A basic fundamental thing about the financial industry is that it consists of a lot of large pottery that can be bought for less money than in the pot. Sometimes there is a story about how a pharmaceutical or technology company trades under cash and marketable securities, and how odd and surprising it is, but it is very common in the banking and insurance industry. JPMorgan Chase & Co. has a stock market valuation of about $ 342 billion, but it has something like $ 600 billion in cash and investments such as cash and other $ 675 billion in trading assets and investment securities. 1 American International Group has a stock market valuation of about $ 37.6 billion, but it has something like $ 240 billion in bonds. 2 If you can buy all stock JPMorgan or AIG, you will soon control more money than you spend on stocks.
This is not a magical free lunch or scam; it is another way of saying that the financial industry, as opposed to the more normalized industry, tends to operate with much leverage. The Bank has a lot of money, mostly investing in fairly liquid financial assets, but most of the money is borrowed (from depositors, etc.) and ultimately has to be repaid. Insurance companies have a lot of money, mostly investing in fairly liquid financial assets, but most of the money comes from insurance policy holders and ultimately has to be repaid. Banks and insurance companies only hold all that money in trust for others. This is a financial institution; it is a business that holds money for others.
But “the money pot you can buy for less money than the frame” can be useful. For example, if you need $ 100 million for some projects, but you only have $ 10 million, you can go to the bank and ask for another borrowing, but they will ask the boring questions like “what this” and “how we know you will pay us back. “But if you are looking for an insurer with a $ 10 million and $ 90 million” floating “equity (money from an insurance premium that will ultimately be payable in a claim) that has $ 100 million of bonds, you can buy the company for $ 10 million, and now you are responsible for a $ 100 million pot. You control the company, you can make yourself a boss, you can sell bonds with cash and invest $ 100 million in your project. 3 If your project is good, then you will refund the investment company with interest, and the value of your equity investment in the insurance company will grow. If your project is bad then you will not be able to repay the insurance company, you will lose your $ 10 million equity investment, and the policyholder’s money will also be risky. If your project is “I’m going to buy a $ 100 million yacht and sail away,” then the policyholder will lose everything, and you will get $ 100 million yachts for $ 10 million.
This is mostly not a magical free lunch or fraud, but not for a deep structural cause or anything. It’s just that all these things are very well known, so the great focus of banking and insurance rules ensures that people controlling banks and insurers not only plunder them for their own personal projects. But, you know, sometimes!
Here’s a story of the Wall Street Journal about Greg Lindberg, a graduate of Yale who runs a business group with the unfortunate name of Eli Global, and who started buying an insurance company to finance his business:
Mr. Lindberg began tracking the insurer for possible acquisition in 2012. What is most impressive, former employees say, is a huge asset cache on the insurer’s balance sheet.
Initially, he sought a small insurer that would not cost much, based on deposition in later litigation on banking fees. His purchase eventually includes Louisiana insurers purchased from Dutch receivers and insurers who are fighting for € 1.
Mr Lindberg told regulators investing in his own business is a safe strategy for insurers because his company has achieved 35% annual investment returns. “Eli Global has a long history in establishing private placements and managing risks successfully,” the company said in a presentation to the regulator.
His first takeover, in 2014, was a small Alabama policy regulator, Southland National Insurance Corp. It has about $ 170 million assets to cover future demands as a player
That cash, at least partly, of the huge sum of money Mr Lindberg was diverted from the group of life insurance companies that he started assembling in 2014, a Wall Street Journal investigation was discovered.
Yale’s experienced executive borrowed at least $ 2 billion from the insurer to a number of its controlled entities, utilizing the amount to extend its personal ownership, according to interviews, supervisory submissions and over 4,500 internal documents from Mr Lindberg’s company reviewed by the Journal.
Lindberg’s asset usage scale of investing in its own business has been a bit earlier in the past few decades, industry experts say, and show hundreds of thousands of policyholders to an incredible and potentially risky strategy.
The story cites federal criminal investigations, and notes that Lindberg’s insurer sometimes exceeds the regulatory limits on related party transactions, obtains approval to transcend the borders of the state’s insurance commissioner whose election campaign is supported, or use a thinner arrangement for overcome the rules. A spokeswoman for Lindberg said he worked with investigators and “worked aggressively” to interfere with related party transactions, and that insurers had earned good capitalization and, “to this point, there was no debt failure” on the loan.
I do not know! The point I want to make is that this good version does not differ from the bad version, and it’s not always easy to tell which one. “Guy buys an insurance company and invests its floats in other business ideas” can illustrate fraud, but it can also explain Warren Buffett. 4 There are significant differences: Buffett does not have any separate ownership interest in any of its businesses, and only makes money from such investment if its conglomerate insurance; Also, his insurance conglomerate does not lend money to buy yachts or anything. But the basic idea of getting an insurance company because they are the cash pot that you can use to finance your investment ideas are long and ordinary and sometimes good, and virtually the nature of their business.
Traditionally, the way Switzerland banking works is if you are rich in the US or France or Russia or anywhere, and you do not want to pay taxes on your wealth, you can put it in a Swiss bank account and tax authorities in your country does not will be able to find it. (This changed.) This is a pretty well-known thing in popular culture, and I think it is better known among rich financial advisers who do not want to pay taxes. Therefore, it is reasonable to think that there are some inbound inquiries, settling people flying to Zurich with a cash-packed luggage and asking their taxi drivers to take them to the nearest private bank.
But banking services are usually “sold, not bought,” as the saying goes, and that is especially true of complex, structured, legal aggressive. Might empty your cash in a suitcase and fly to Zurich is not actually the best way to avoid taxes and open Swiss bank accounts? This is the kind of thing you want your Swiss bank to tell you before you appear in front of the door. Similarly, in practice there are also Swiss bankers who fly from Zurich and hunt for customers in Dallas or Moscow or Paris.
There is a problem with this, though, for several years Switzerland is less likely to take a position that hides money from foreign tax authorities is the natural right of every human being, foreign tax authorities do not. Squirreling your money from the United States or France or anywhere to hide it in Switzerland and avoiding taxes is illegal in those countries, and therefore Swiss banks flying around the world for the pitch, are seen in certain light (law- law), requesting a crime. And so many things happen:
According to the judgment, Swiss banks found businesses by traveling through France using encrypted hard drives and businesses without logos. They are also given a “safety risk governance” guide that provides guidelines on how to limit the risk of discovery as they move.
The manual tells employees not to store their customer name, to eliminate sensitive data if needed or when crossing borders, using different hotels to other UBS employees, and unpredictable in their movements, including the taxis they take and the restaurants they eat .
It’s from the Financial story