Introduced as part and parcel in the financial service of microfinance / microcredit clients, does microinsurance really protect the “Little Guys” – i.e. microcredit-funded entrepreneurs?
By: Ringo Bones
Ever since the runaway success of Dr. Muhammad Yunus’ Banking for the Poor-inspired microcredit and microfinance programs across the globe, many microfinance institutions had began introducing microinsurance services in order to protect the financial successes of microfinance and microcredit clients against the onslaught of the global economic downturn. Given that some established “conventional” economist had always been skeptical of these “extremely subprime loans”, does microinsurance really protect these small business owners against the economic uncertainties of the global credit crisis circa 2009? Or is this just a “brilliant” financial instrument made to extract the maximum amount of profits from the poor microcredit and microfinance clients.
According to some official microcredit and microfinance service providers’ websites, microinsurance is defined as a system by which people, business, and other organizations funded by microcredit and microfinance programs make premium payments to share risks. Access to insurance with low premium rates enables microcredit funded entrepreneurs to concentrate more on growing their business – i.e. reinvesting a significant portion of their profits back into their business – while providing mechanisms that mitigate risks affecting property, health, and the ability to do work. Especially during the fiscal uncertainties of our current global economic downturn where every corporate and business entity of every size, shape or form are affected in a negative way.
The rationale behind microinsurance is to provide a system that will help poor people - especially microfinance and microcredit recipients – cope with sudden expenses associated with serious illness (current swine flu outbreak?) or loss of assets. Studies recently conducted on microfinance and microcredit recipients / clients have shown that merely having access to conventional savings accounts has also proved to be an incentive to save for that proverbial rainy day. Clients who join and stay in microfinance / microcredit programs have better economic conditions than non-clients do – at least from a cash-based / credit-based economic point of view.
The question now is does microinsurance – like it’s well established sibling, credit insurance had done to big business – really help microcredit / microfinance recipients? Though it is yet a relatively new financial scheme, microinsurance – at least on paper – could theoretically provide microcredit and microfinance institutions around the world the ability to provide financial security to their established clients. As an investor in our local microcredit / microfinance provider for almost five years, I’ve noticed that our local fish and fresh produce vendors had been enjoying relative financial security that can’t be found just ten years before. And this was the advent before microinsurance schemes were introduced. From my point of view, it is still way too soon to conclude that microinsurance – in actual practice – is just another useless business expense. Maybe we’ll check it out in a few months’ time.
Showing posts with label Credit Insurance. Show all posts
Showing posts with label Credit Insurance. Show all posts
Thursday, May 7, 2009
Thursday, October 16, 2008
The American Taxpayer: Insurance Underwriters of Last Resort?
The Bush Administration’s 700 billion-dollar bailout package is supposedly for increasing banking liquidity – i.e. make banks more confident in providing credit. But is it wise to use the American taxpayer’s money?
By: Ringo Bones
As a way of mitigating the worst effects of the US Credit Crisis - which has now become global, the Bush Administration gave the green light on the implementation of their 700 billion-dollar bailout plan. An overwhelming majority of American taxpayers now question the wisdom of using public funds to bail out the follies that was caused by Wall Street’s “Quixotic Adventurism” in pursuit of easy money. While many Americans are now beginning to understand that when major financial institutions are allowed to fail – like Lehman Brothers – the negative repercussions will surely be felt around the world. And the question now is the decision to use the American taxpayer’s money a wise choice? Those in the know will inevitably be saying: “But isn’t this tantamount to a nationalization that would inevitably transform the US banking system from a free market economy to a command socialist economy?” After all, this inevitability will surely undermine the ideological underpinnings of Wall Street’s perception of what free market capitalism should be – a paragon of the American Protestant Work Ethic.
Central banks around the world are now coordinating to implement a plan modeled after the Bush Administration’s 700 billion dollar economic bailout scheme – albeit at a more modest scale. This is due to the fact that the International Monetary Fund’s top brass’ praise of the Bush Administration’s economic bail out scheme as “the most sensible so far” in solving our current global economic crisis. Thus the taxpayers disdain of using public funds to bail out the excesses and adventurism of the banking sector is no longer confined to the United States.
If the taxpayers’ money ever becomes the financial too of choice by governments to bail out their ailing economies, then the majority of us taxpayers will inevitably be harboring resentment. Plus that ever increasing consensus that insurance companies make so much because they charge clients / their customers high premiums and then underplay or deny claims altogether. Some have even said that insurance companies are just daring us to fight back. Will incidence of insurers bad faith rear its ugly head on every government around the world attempts’ in alleviating our global financial crisis?
By: Ringo Bones
As a way of mitigating the worst effects of the US Credit Crisis - which has now become global, the Bush Administration gave the green light on the implementation of their 700 billion-dollar bailout plan. An overwhelming majority of American taxpayers now question the wisdom of using public funds to bail out the follies that was caused by Wall Street’s “Quixotic Adventurism” in pursuit of easy money. While many Americans are now beginning to understand that when major financial institutions are allowed to fail – like Lehman Brothers – the negative repercussions will surely be felt around the world. And the question now is the decision to use the American taxpayer’s money a wise choice? Those in the know will inevitably be saying: “But isn’t this tantamount to a nationalization that would inevitably transform the US banking system from a free market economy to a command socialist economy?” After all, this inevitability will surely undermine the ideological underpinnings of Wall Street’s perception of what free market capitalism should be – a paragon of the American Protestant Work Ethic.
Central banks around the world are now coordinating to implement a plan modeled after the Bush Administration’s 700 billion dollar economic bailout scheme – albeit at a more modest scale. This is due to the fact that the International Monetary Fund’s top brass’ praise of the Bush Administration’s economic bail out scheme as “the most sensible so far” in solving our current global economic crisis. Thus the taxpayers disdain of using public funds to bail out the excesses and adventurism of the banking sector is no longer confined to the United States.
If the taxpayers’ money ever becomes the financial too of choice by governments to bail out their ailing economies, then the majority of us taxpayers will inevitably be harboring resentment. Plus that ever increasing consensus that insurance companies make so much because they charge clients / their customers high premiums and then underplay or deny claims altogether. Some have even said that insurance companies are just daring us to fight back. Will incidence of insurers bad faith rear its ugly head on every government around the world attempts’ in alleviating our global financial crisis?
Friday, August 29, 2008
Collaterized Debt Obligations: Instigating the Global Credit Crunch?
Somewhat unfairly blamed as the instigating agent of the 2007 Global Credit Crunch, are collaterized debt obligations or CDO, really deserving of such infamy?
By: Ringo Bones
After reading the latest book by the billionaire investor guru George Soros titled “The New Paradigm for Financial Markets”, I recently had an epiphany that stability and equilibrium are not our Wall Street controlled global economy’s natural state of being. Instead, the quixotic adventurism in search of quick and easy profits undertaken under unacceptable levels of risk is the rule, rather than the exception. Thus explaining the inevitability of the global credit crunch and the current yo-yoing price of crude oil pegged against the US dollar. Even the rise of asset backed security based on synthetic constructs marketed as investments to anyone who likes to experience first-hand what it's like to be financially devastated by an Enron-type scheme.
Often referred to by everyone’s friendly neighborhood financial advisor as an asset backed security product that works just like a home insurance against losses from fire and theft. Except that it applies to big corporation’s credit insurance which you – a mere civilian – can easily get rich of off. By the start of the 21st Century, CDO s was being sold-off to with alarming frequency to financially ignorant civilians – i.e. people like you and me. Your friendly neighborhood financial advisor might – and it’s very likely – to have made ungodly amounts of money relatively easily. Surprisingly to you – the financially ignorant - through the sheer inherent complexity of structured financial transactions of CDO s that he or she –your financial advisor – might seem like a saint for helping you, the financially ignorant retail chump, to experience your friendly neighborhood financial advisors new found get-rich-quick scheme. Except your financial advisor forgot to mention one tiny but very important detail. You must sell – i.e. pass on / dump them – your CDO s once the financial markets turns into a “Bear”. But most of all, are collaterized debt obligations or CDO deserving of their infamy? But first, let us first explain what is a CDO.
Collaterized Debt Obligations or CDO s are often described by financial academics as a type of asset-backed security and structured credit product. CDO ’s are constructed from a portfolio of fixed-income assets. The assets are divided into different credit rating tranches: senior tranches which are rated AAA or “triple a”, mezzanine tranches which are lower on the credit rating “food chain” are rated AA to BB, and the equity tranches, which are unrated. The first CDO were issued back in 1987 by bankers of the now defunct Drexel Burnham Lambert Inc. for the Imperial Savings Association. A decade later, CDO s became the fastest growing sector of the asset-backed “synthetic” securities market.
A major factor for the further growth of CDO s at the start of the 21st Century was the 2001 introduction of Gaussian Copula Models by David X. Li. Which allowed the rapid pricing of CDO s. Because of this, Collaterized Debt Obligations became a major force in the so-called derivatives market were the value of the derivative is derived from the value of other assets. But unlike some fairly straightforward – i.e. “real” derivatives – such as stock options, calls and even the much-maligned Credit Default Swap, CDO s were nearly impossible for the average person to understand. To me at least, the higher mathematics used in creating synthetic securities constructs like Collaterized Debt Obligations and its related variants like Collaterized Insurance Obligations are better to be used in designing weapons systems that will allow a 250-gram projectile to be thrown at 2,700 feet per second. Most of all if anything goes terribly wrong, asset-backed synthetic securities are really worth less than the paper they are printed on, or the bits – one’s and zeroes – they are encoded on.
The complexity of CDO products – which the investor savvy swears by for making him or her earn easy money – is the reason why CDO s are often blamed by the mainstream news media for the 2007 credit crunch. This inherent complexity is often blamed for the failure of risk and recovery models used by credit rating agencies to value these products. Worst of all, CDO s and their ilk are just mere “financial constructs” – as opposed to concrete assets like gold or land. Complicating matters even more was that there was no market on which to sell the CDO s – i.e. CDO s aren’t traded on exchanges. Causing many CDO customers to be mauled by the impending Bear Market. Which is no Bull by the way.
Given that the math used for credit rating various CDO products is about as complex as the higher mathematics used to quantify the dynamics of certain complex sociological phenomena, its best to be pragmatic. It might lead some to some desperation in embracing Sharia Banking Laws in order to retain a semblance of financial stability in our post global credit crunch environment. Were the sobering fact fiscal austerity are forcing credit and bond insurance underwriters to finally remember what it means to be prudent in doing business.
By: Ringo Bones
After reading the latest book by the billionaire investor guru George Soros titled “The New Paradigm for Financial Markets”, I recently had an epiphany that stability and equilibrium are not our Wall Street controlled global economy’s natural state of being. Instead, the quixotic adventurism in search of quick and easy profits undertaken under unacceptable levels of risk is the rule, rather than the exception. Thus explaining the inevitability of the global credit crunch and the current yo-yoing price of crude oil pegged against the US dollar. Even the rise of asset backed security based on synthetic constructs marketed as investments to anyone who likes to experience first-hand what it's like to be financially devastated by an Enron-type scheme.
Often referred to by everyone’s friendly neighborhood financial advisor as an asset backed security product that works just like a home insurance against losses from fire and theft. Except that it applies to big corporation’s credit insurance which you – a mere civilian – can easily get rich of off. By the start of the 21st Century, CDO s was being sold-off to with alarming frequency to financially ignorant civilians – i.e. people like you and me. Your friendly neighborhood financial advisor might – and it’s very likely – to have made ungodly amounts of money relatively easily. Surprisingly to you – the financially ignorant - through the sheer inherent complexity of structured financial transactions of CDO s that he or she –your financial advisor – might seem like a saint for helping you, the financially ignorant retail chump, to experience your friendly neighborhood financial advisors new found get-rich-quick scheme. Except your financial advisor forgot to mention one tiny but very important detail. You must sell – i.e. pass on / dump them – your CDO s once the financial markets turns into a “Bear”. But most of all, are collaterized debt obligations or CDO deserving of their infamy? But first, let us first explain what is a CDO.
Collaterized Debt Obligations or CDO s are often described by financial academics as a type of asset-backed security and structured credit product. CDO ’s are constructed from a portfolio of fixed-income assets. The assets are divided into different credit rating tranches: senior tranches which are rated AAA or “triple a”, mezzanine tranches which are lower on the credit rating “food chain” are rated AA to BB, and the equity tranches, which are unrated. The first CDO were issued back in 1987 by bankers of the now defunct Drexel Burnham Lambert Inc. for the Imperial Savings Association. A decade later, CDO s became the fastest growing sector of the asset-backed “synthetic” securities market.
A major factor for the further growth of CDO s at the start of the 21st Century was the 2001 introduction of Gaussian Copula Models by David X. Li. Which allowed the rapid pricing of CDO s. Because of this, Collaterized Debt Obligations became a major force in the so-called derivatives market were the value of the derivative is derived from the value of other assets. But unlike some fairly straightforward – i.e. “real” derivatives – such as stock options, calls and even the much-maligned Credit Default Swap, CDO s were nearly impossible for the average person to understand. To me at least, the higher mathematics used in creating synthetic securities constructs like Collaterized Debt Obligations and its related variants like Collaterized Insurance Obligations are better to be used in designing weapons systems that will allow a 250-gram projectile to be thrown at 2,700 feet per second. Most of all if anything goes terribly wrong, asset-backed synthetic securities are really worth less than the paper they are printed on, or the bits – one’s and zeroes – they are encoded on.
The complexity of CDO products – which the investor savvy swears by for making him or her earn easy money – is the reason why CDO s are often blamed by the mainstream news media for the 2007 credit crunch. This inherent complexity is often blamed for the failure of risk and recovery models used by credit rating agencies to value these products. Worst of all, CDO s and their ilk are just mere “financial constructs” – as opposed to concrete assets like gold or land. Complicating matters even more was that there was no market on which to sell the CDO s – i.e. CDO s aren’t traded on exchanges. Causing many CDO customers to be mauled by the impending Bear Market. Which is no Bull by the way.
Given that the math used for credit rating various CDO products is about as complex as the higher mathematics used to quantify the dynamics of certain complex sociological phenomena, its best to be pragmatic. It might lead some to some desperation in embracing Sharia Banking Laws in order to retain a semblance of financial stability in our post global credit crunch environment. Were the sobering fact fiscal austerity are forcing credit and bond insurance underwriters to finally remember what it means to be prudent in doing business.
Thursday, July 31, 2008
Credit Default Swaps: Easy Money through Complexity?
Often referred to as a sophisticated form of credit insurance that’s an easy source of big money for the financially savvy, that is until greedy speculators used them to cash in on the US subprime mortgage crisis. Green backs from Red Tape?
By: Vanessa Uy
Financial regulators now bemoan the existence of Credit Default Swaps or CDS. Some even say that trading in Credit Default Swaps ought to be crime because of the way it siphons the hard-earned money of less investment savvy folks into the coffers of greedy speculators. This almost criminal practice of earning big money easily was recently highlighted by the financially savvy purchasers of homeowners insurance who opted for Credit Default Swaps to hedge their risks, which unfortunately created a “domino-effect” that led into the US credit crunch and the subprime mortgage crisis. Because of this, majority of US banks and other financial institutions no longer trust the credit worthiness of their fellow “financial institutions” due to the effects of the unregulated trade in Credit Default Swaps. But in order for us to form a sound judgment over Credit Default Swaps, let us first define what it is.
A Credit Default Swap or CDS is a credit derivative – i.e. financial instruments of special nature – dealt between two counterparties. One party makes periodic payments – usually in the form of insurance premiums – to the other and receives the promise of a payoff if a third party defaults. The former party receives credit protection via credit insurance and is said to be the “purchaser”. The other party provides credit protection and is said to be the "seller”, while the third party is known as the “reference entity”. For all intents and purposes, Credit Default Swaps are nothing more than privately traded insurance contracts that let people bet on a certain company’s financial health.
When it comes to credit derivative products, Credit Default Swaps are the most widely traded. The usual term of maturity of a CDS contract is five years. But because it is a derivative that’s dealt over-the-counter, Credit Default Swaps of almost any maturity can be traded.
As credit derivatives go, Credit Default Swaps are a relatively recent development. Back in 1995, Blythe Masters of JP Morgan developed the first Credit Default Swap and Collaterized Debt Obligations even though other bond insurance products are already available since the 1970’s. When Blythe Masters was heading the Global Credit Derivatives group of JP Morgan, he introduced Credit Watch in April 2, 2007 as a regulatory measure and also to help evaluate credit swaps among other financial instruments. By the end of 2007, there is an estimated 45 trillion US dollars worth of Credit Default Swap contracts. But if the inherent regulatory measures are well established, then what’s the problem?
The problem with Credit Default Swaps occurs when they hit the market. Everyone knows that banks and insurance companies are regulated, while the credit swaps market is not. Because of this, contracts can be traded – or swapped – from investor to investor without any regulatory body overseeing the trades to ensure the buyer has the resources to cover the losses if the security defaults. The instruments can be bought and sold from both ends – the insured and the insurer – with nary an oversight. Thus your typical greedy speculator has now been granted “free reign” to prey upon the financially ignorant and those with gullibility for get rich quick schemes. For all intents and purposes, the current market in credit derivatives has now become Mephistopheles’ playground due to lack of regulation and oversight. Thus perpetuating our current financial crisis in which these forms of credit insurance were built to prevent in the first place.
By: Vanessa Uy
Financial regulators now bemoan the existence of Credit Default Swaps or CDS. Some even say that trading in Credit Default Swaps ought to be crime because of the way it siphons the hard-earned money of less investment savvy folks into the coffers of greedy speculators. This almost criminal practice of earning big money easily was recently highlighted by the financially savvy purchasers of homeowners insurance who opted for Credit Default Swaps to hedge their risks, which unfortunately created a “domino-effect” that led into the US credit crunch and the subprime mortgage crisis. Because of this, majority of US banks and other financial institutions no longer trust the credit worthiness of their fellow “financial institutions” due to the effects of the unregulated trade in Credit Default Swaps. But in order for us to form a sound judgment over Credit Default Swaps, let us first define what it is.
A Credit Default Swap or CDS is a credit derivative – i.e. financial instruments of special nature – dealt between two counterparties. One party makes periodic payments – usually in the form of insurance premiums – to the other and receives the promise of a payoff if a third party defaults. The former party receives credit protection via credit insurance and is said to be the “purchaser”. The other party provides credit protection and is said to be the "seller”, while the third party is known as the “reference entity”. For all intents and purposes, Credit Default Swaps are nothing more than privately traded insurance contracts that let people bet on a certain company’s financial health.
When it comes to credit derivative products, Credit Default Swaps are the most widely traded. The usual term of maturity of a CDS contract is five years. But because it is a derivative that’s dealt over-the-counter, Credit Default Swaps of almost any maturity can be traded.
As credit derivatives go, Credit Default Swaps are a relatively recent development. Back in 1995, Blythe Masters of JP Morgan developed the first Credit Default Swap and Collaterized Debt Obligations even though other bond insurance products are already available since the 1970’s. When Blythe Masters was heading the Global Credit Derivatives group of JP Morgan, he introduced Credit Watch in April 2, 2007 as a regulatory measure and also to help evaluate credit swaps among other financial instruments. By the end of 2007, there is an estimated 45 trillion US dollars worth of Credit Default Swap contracts. But if the inherent regulatory measures are well established, then what’s the problem?
The problem with Credit Default Swaps occurs when they hit the market. Everyone knows that banks and insurance companies are regulated, while the credit swaps market is not. Because of this, contracts can be traded – or swapped – from investor to investor without any regulatory body overseeing the trades to ensure the buyer has the resources to cover the losses if the security defaults. The instruments can be bought and sold from both ends – the insured and the insurer – with nary an oversight. Thus your typical greedy speculator has now been granted “free reign” to prey upon the financially ignorant and those with gullibility for get rich quick schemes. For all intents and purposes, the current market in credit derivatives has now become Mephistopheles’ playground due to lack of regulation and oversight. Thus perpetuating our current financial crisis in which these forms of credit insurance were built to prevent in the first place.
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