Posted on 12/17/2002 9:41:23 PM PST by BlackJack
There is no way they can be liquid with only $1.1 billion in equity left, only 2% of assets. They can't turn all of their assets into cash in a day, you know. And whether they are actually worth their full value, especially if needed right away, is always problematic. In liquidations, it is not uncommon to see the valuation of the asset side of the sheet - for everything beyond cash - shrink by 30%, while the liabilities side stays about the same.
Um, it is a bit more twisted than that. It was indeed based on dodgy accounting, and on the stock market boom. Conseco insured the "subprime" markets, mobile homes being just one late example of that strategy. The main characteristics of those areas are (1) little competition or prior penetration (2) low credit quality and high risk of losses. Combined, they make for great uncertainty in valuing any long-dated claim.
Insurance is already a business in which there is notoriously wide latitude for accounting games. Because claims are some weighted stream of future liabilities in unknown amounts, that you have to just estimate beforehand. Income on the other hand shows up in premiums immediately, before the full scale of the later losses they have to pay are known. Whether they premiums will all be collected, whether they will exceed the present value of the future losses, whether investment returns on the capital held in the meantime will be this high or that low - are all uncertain even in the absence of serious credit risks, and even with plenty of competitors for comparisons, etc.
In any insurance company, investors have to count on the honesty of the financials coming from management to an extraordinary degree. Because so much is estimated, and those estimates can not only be widely wrong when honest, but can easily be "shaded" this way or that and still appear honest. When even an honest man can only give an estimate, it is easy for a dishonest one to cover his tracks, in other words. He just claims it was his best guess and he is sorry he was off.
Now, when you write a lot of new insurance business and fudge the estimates, you can downplay the future costs, and book the present premiums immediately, and then capitalize them at some nice rate based on how much you think you are going to earn in a nice investment environment, during the period between collecting the premiums and paying out the claims.
If the stock market is also hot and falls in love with your stock, it will then capitalize the same growth a second time, by projecting your "earnings increases" into the future, and on the basis of "strong growth", affording your stock a high PE ratio. So you book a bit of business that in the long run may do not better than break even, and people instead see $1 in "earnings" now, and project $10 of earnings on an upward trend later, revise upward your "proper" PE, and voila, $40 in stock price.
The reason this becomes a game is there is then feedback between that boosted stock price and the real capabilities of the company. It can buy other properties with pricey stock. It can sell stock for cash or to retire debt. It can pay insiders in options, lowering expenses. So expenses look lower and the top line grows "easily" through acquisitions.
As long as the stock price stays "mongo", that is. And the rate of writing new business keeps on rising, masking problems with older policies (5 years ago, 10 years ago at an acquired unit, etc), which are dwarfed by the newer ones where only recent estimates and the front-loaded premium stream have had time to show up yet. All the potential bad news is off in a future that can be postponed until after the stock stops rising.
Then the chickens come home to roost and you find out exactly how good the past estimates have been, how sensible the policy underwriting has been, whether they paid too much for their acquisitions, etc. It is real easy to expand in new areas by just writing senseless business. Plenty of people are willing to take out insurance policies that will wind up earning them money, instead of the insurance company. And there isn't a lot of competition, if you set your premium so low that you are really losing your shirt 10 years down the road.
"Bubble" insurers are a perennial in bull markets. The reality behind the "bootstrap" feedback effect of a mongo stock price can attract speculating "believers". If all of the new business were well written, none of the premiums set too low, all of the loss reserves accurate, etc, then an insurer can indeed make money hand over fist in a rising market. They have other people's capital to invest, at a time when investments are generating huge, outsized returns.
But the least bit of overaggressiveness, especially if wishful thinking starts shading over into dishonest accounting, and the whole thing can go kaboom. There is no doubt in my mind that is what happened with Conseco. I remember watching it back in the bubble phase. I avoided it for exactly the reasons explained here, so anyone could have seen it coming. Not everyone, though, which is why such things always manage to happen anyway.
Well, I suppose the fact that these numbers come from professional liars might be considered evidence.
Yes, all those blue collar, mobile home livers are just no good and the sooner we get them in government housing, they better off we will be. They are all just deadbeats anyway. They should get themselves a tech job and buy one of those nice expensive houses. You know the ones that are being forclosed on in record numbers now. But of course, if you are white collar and live in a nice community, it is a tragedy. If you are blue collar and live in a mobile home, you deserve it.
Oh, please let's not be so sensitive. I have relatives that live in mobile home parks. They are very nice people and I have spent many an hour kicking back in their double-wide. I would not, however, consider lending them, or any of their neighbors I have met, money. It isn't anything personal, it is just the transient nature of the community. Most do not buy mobile homes because they always wished to live in an aluminum and steel box, but because it is the best housing they can afford. I don't think that they deserve to be forclosed on, but I would be willing to bet that the forclosurer rate on mobile homes is higher than on other types of housing and I would also be willing to bet that the rate of appreciation is less than that of most real estate, if it isn't negative. Take property depreciation, transient owners, and lending money and put them all together and you have the third largest corporate bankruptcy in history.
I am not sensitive. I don't live in a mobile home and I don't think I have any relatives that do so I didn't take it personally.
I just hate snobbery -
I am not ignorant of mobile homes and their problems - but somehow, I don't think we can blame the bankruptcy of this large company on the financing of mobile homes. No matter how unsavory and low class some people think the purchasers of them are.
I hate snobbery. It really speaks volumnes abut the people who behave that way. It tells me those people are so insecure in themselves, they must put down others to make themselves feel good. They must feel they would be nothing without their trappings, since they j udge others worth and integrity by their job, etc. I just don't like it.
As for the double-wides, in our part of the world, these are not 'mobile homes'. They are usually placed on pieces of property from 2 to 10, or whatever acres which is also mortagaged with the home.
Just hate snobbery.
The top 12 U.S. bankruptcies, ranked by assets:
-- WorldCom Inc., July 21, 2002; $103.9 billion
-- Enron Corp., Dec. 2, 2001; $63.4 billion
-- Conseco Inc., Dec. 18, 2002; $52 billion
-- Texaco Inc., April 12, 1987; $35.9 billion
-- Financial Corp. of America, Sept. 9, 1988; $33.9 billion
-- Global Crossing Ltd., Jan. 28, 2002; $25.5 billion
-- UAL Corp., Dec. 9, 2002; $25.2 billion
-- Adelphia, June 25, 2002; $24.4 billion
-- Pacific Gas and Electric Co., April 6, 2001; $21.5 billion
-- MCorp., March 31, 1989; $20.2 billion
-- Kmart Corp. Jan. 22, 2002, $17.0 billion
-- NTL Inc., May 8, 2002, 16.8 billion
------ Source: Bankruptcy Data.com, Securities and Exchange Commision filings
Not trying to start a flame war, but which part of my post was "snobbish?" To help narrow it down, I will include the part of the post refering to Mobile Homes, since I can't see how the part referring to airlines could be elitist.
Really, who was the rocket scientist that thought that lending money to Mobile Home buyers was the road to riches? A transient blue collar/low income retiree customer base does not strike me as hugely profitable.
What in that was offensive or insensitive? Everywhere I have travelled, the local mobile home park is not considered the ritzy part of town. I don't think it is a secret that most who choose to live in mobile homes are not wealthy. "Transient" refers to the ability of the homes themselves to be moved. "Blue collar/low income retiree customer base" refers to the overwhelming majority of the mobile home owners who are usually either blue collar workers or low income retirees. I made no demeaning comments regarding lifestyle or work ethic. I mearly commented that, for me, I would not consider it to be a profitable investment. This would be based on the fact that the "property" being mortgage is movable and depreciates, combined with a customer base generally not know for being financially well off. If I lost my job and the bank had to foreclose on my house, they would have a piece of property that was worth more than I have borrowed against it. So in the unfortunate event of forclosure, they still make money.
But then again, there is NASCAR...
Even NASCAR people will tell you that this a sport that appeals to blue collar workers and makes a lot of money. This was a bon mot to indicate that all things related to blue collar workers do not have to be unprofitable.
Seriously, please point out to me that which was offensive.
Sorry, that sounds very snobbish to me. Just no good, low income, irresponsible, deadbeats, low class. Yeah, it sounds snobbish.
In this part of the country, double wides are homes. Most of them are in the country on property that is also mortgaged with the house. They are considered houses, taxes as houses, etc. These people are no more transient than anyone else. These homes are not inexpensive either. The interest rate is not the same as a houses, either, so the company is making a little more.
But you are trying to tell me that the 3rd largest bankruptcy in the nation was caused by these deadbeat, trailerpark living, blue collar workers. I would suggest you might look at the management of the company. Of course, it is hard to say that someone driving that BMW,instead of a dooley, wearing designer clothes, instead of Wranglers, playing raquetball instead of rodeoing or enjoying Nascar is a deadbeat isn't it?
I don't intend to start a flame war either and will end it here. If you meant nothing by it, sorry to jump - but the attitude that unless you have plugged into the expensive brick home, drive a upscale auto, etc. you are somehow less than desirable. THat bothers me.
I would suggest that when one of those upscale people declare bankruptcy and get to keep their upscale cars, upscale home, wipe out all the credit card debts, debt for boats, and all their other goodies, the creditors, and consumers as a whole, loose more than when that 'works with his hands' man walks away from a mobile home. While more may walk away from the mobile home, it would take quite a few of them to equal the amount of just one of the upscale people.
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