Just as California's State Compensation Insurance Fund was rebounding from the Unicover induced crisis in the workers' compensation market, which forced SCIF to protect more than 50% of the market by year 2000, the monolithic carrier succumbed to enticing bond purchases that was part of the precipitous mortgage backed securities debacle that plunged the country into the worst recession in history by 2008.
Insurance companies routinely invest in bonds because they are relatively safe investments and not generally subject to the vagaries of the market - they are fixed income securities upon which an investor can usually expect the represented return of both interest and the underlying capital.
SCIF alleged in a 2011 federal lawsuit that financial services giant Lehman Brothers misrepresented the risk associated with more than $85 million in investment bonds the Fund purchased between 2004 and 2008.
Those bonds, which were to mature between 2010 and 2014, were allegedly sold in 2009 for $19 million.
The carrier just recently dismissed from that lawsuit three Lehman executives it alleged steered the brokerage into selling these misguided investments all the while misrepresenting to customers, SCIF and others, the true extent of the firm's financial degradation and concealing the worthlessness of the mortgages underlying the purchased bonds.
WorkCompCentral's Mike Whiteley reports this morning that a joint stipulation filed in U.S. District Court for the Southern District of New York June 3 dismisses former Lehman Brothers Chairman and Chief Executive Officer Richard S. Fuld Jr., former Chief Financial Officer and former Global Chief Risk Officer Christopher M. O'Meara and former Chief Financial Officer Erin Callahan as the three "officer defendants" in the lawsuit.
The joint stipulation cites a confidential, $1 million settlement agreed to by Fuld, O'Meara, Callan and SCIF last October. As part of the settlement, which was later filed in district court, the officers admitted no wrongdoing and denied any wrongdoing by Lehman Brothers.
The lawsuit originally named as defendants the three executives, nine former directors of Lehman Brothers and 19 firms that underwrote the Lehman Brothers bonds. Cabrera Capital Markets, Citigroup Global Markets, Mellon Financial Markets, and Wells Fargo Securities were among the underwriters named in the lawsuit.
The only remaining defendant now is Lehman's auditors, Ernst & Young, which was added to the case in a Jan. 5, 2012, amended complaint. That filing alleges the auditor was intimately familiar with Lehman's operations but turned a "blind eye" to Lehman's shenanigans.
Ernst & Young had previously agreed to pay $99 million to Lehman Brothers investors to settle a class-action case alleging Lehman Brothers understated its risk in the commercial real estate mortgage market and overestimated its financial solvency.
When Lehman Brothers filed for bankruptcy, it listed $619 billion in debt and $639 billion in assets. The company was liquidated in 2011 and had distributed about $56 billion to outside creditors by last month.
The case is illustrative of the deep ties that workers' compensation has to the overall economy besides just providing a risk distribution system against work place injuries.
It is also a microcosmic look at how even the most sophisticated investors can get duped.
But it is also demonstrates the risks involved in providing insurance - for a smaller carrier a net $66 million loss in the value of an investment is disastrous. SCIF has the financial muscle to absorb that loss, but losses like this eventually make the way down to the policy holder.
SCIF has done a remarkable job diversifying its portfolio and keeping expenses low for such a large institution, albeit many disagree with its current course of financial restructuring.
Nevertheless, it's easy to see the lingering effects of the mortgage based securities meltdown that put the world's financial systems to their knees.
By the way, the lawsuit states that Lehman CEO Fuld received $111.8 million in salary, bonuses and restricted stock unit awards between fiscal year 2003 and 2007.
Just saying...
Showing posts with label bankruptcy. Show all posts
Showing posts with label bankruptcy. Show all posts
Wednesday, June 25, 2014
Tuesday, July 23, 2013
Detroit's Work Comp Question
The nation's largest ever municipal bankruptcy filing includes $86.5 million on current workers' compensation liabilities.
Detroit, MI made news last week with its filing, seeking Chapter 9 protection and restructuring of its debt of $18.5 billion.
The city is self insured for workers' compensation.
And unlike the automakers that call Detroit home, reliance on the state self-insured security fund may be necessary to keep workers' compensation benefits flowing to injured workers and to meet new obligations that may arise during bankruptcy pendancy.
In 2009, General Motors and Chrysler went through their restructures, but did not call upon the self-insured security fund, because trustees at the time felt that doing so would also bankrupt the fund, and would result in more cost than could be saved due to the companies' cross-jurisidiction liabilities.
Those arguments are invalid in the city's case. The city's workers' compensation liabilities are limited to the state of Michigan, and the workers' compensation liabilities of the city are much smaller than either GM or Chrysler at the time.
In the meantime, the city's retired employees are seeking to block Detroit's Chapter 9 filing, saying it violated the state’s Constitution because it could cut city workers’ pensions in violation of the Michigan state constitution.
The city of course argues that the lawsuit belongs in the bankruptcy court.
While the Supremacy Clause of the United States Constitution would generally make the bankruptcy court supreme over any state court, Samuel J. Gerdano, the executive director of the American Bankruptcy Institute told the New York Times that Chapter 9 bankruptcy does have a provision that prohibits proposing a bankruptcy plan that violates state law, which in Michigan’s case could include making changes to accrued public employee pensions and benefits.
It is unclear whether workers' compensation would be included in this context.
Fellow blogger, New Jersey attorney Jon Gelman, said on Friday that the bankruptcy filing "is a sentinel event marking the end of a booming industrial era for the US, and its disability and retirement programs, and demonstrates the consequences of a benefit scheme built on empty promises for injured workers."
While the city's filing is certainly the largest of municipal bankruptcies in history, I'm not sure it is the end of an era, nor reflective of an empty promise.
What the filing does show is how intricately woven workers' compensation is into the overall economy.
By its nature, workers' compensation is designed to allocate risk over a broad base so that any individual action can be absorbed by the population at large.
That is why there are security funds in place to accommodate situations where an employer can no longer meet its financial obligations.
Yes, the risk is then spread to the general population which ultimately may result in increased taxes or assessments (and in Michigan's case, there is declining population upon which to spread that risk, which means greater proportional share by each individual tax payer).
But the promise to employees is that there is a system in place upon which we can all rely in the unfortunate event of a work place injury.
Detroit's case is much, much bigger though, and by early reports its workers' compensation program is not well funded.
Detroit, MI made news last week with its filing, seeking Chapter 9 protection and restructuring of its debt of $18.5 billion.
The city is self insured for workers' compensation.
And unlike the automakers that call Detroit home, reliance on the state self-insured security fund may be necessary to keep workers' compensation benefits flowing to injured workers and to meet new obligations that may arise during bankruptcy pendancy.
In 2009, General Motors and Chrysler went through their restructures, but did not call upon the self-insured security fund, because trustees at the time felt that doing so would also bankrupt the fund, and would result in more cost than could be saved due to the companies' cross-jurisidiction liabilities.
Those arguments are invalid in the city's case. The city's workers' compensation liabilities are limited to the state of Michigan, and the workers' compensation liabilities of the city are much smaller than either GM or Chrysler at the time.
In the meantime, the city's retired employees are seeking to block Detroit's Chapter 9 filing, saying it violated the state’s Constitution because it could cut city workers’ pensions in violation of the Michigan state constitution.
The city of course argues that the lawsuit belongs in the bankruptcy court.
While the Supremacy Clause of the United States Constitution would generally make the bankruptcy court supreme over any state court, Samuel J. Gerdano, the executive director of the American Bankruptcy Institute told the New York Times that Chapter 9 bankruptcy does have a provision that prohibits proposing a bankruptcy plan that violates state law, which in Michigan’s case could include making changes to accrued public employee pensions and benefits.
It is unclear whether workers' compensation would be included in this context.
Fellow blogger, New Jersey attorney Jon Gelman, said on Friday that the bankruptcy filing "is a sentinel event marking the end of a booming industrial era for the US, and its disability and retirement programs, and demonstrates the consequences of a benefit scheme built on empty promises for injured workers."
While the city's filing is certainly the largest of municipal bankruptcies in history, I'm not sure it is the end of an era, nor reflective of an empty promise.
What the filing does show is how intricately woven workers' compensation is into the overall economy.
By its nature, workers' compensation is designed to allocate risk over a broad base so that any individual action can be absorbed by the population at large.
That is why there are security funds in place to accommodate situations where an employer can no longer meet its financial obligations.
Yes, the risk is then spread to the general population which ultimately may result in increased taxes or assessments (and in Michigan's case, there is declining population upon which to spread that risk, which means greater proportional share by each individual tax payer).
But the promise to employees is that there is a system in place upon which we can all rely in the unfortunate event of a work place injury.
When the city of Vallejo, CA submitted its bankruptcy plan in 2009, resolution of workers' compensation claims were subject to a hefty discount according to the Wall Street Journal. I suspect, however, that the reporter of that story was confused about "compensation" and mixed up the city's actual workers' compensation program with its other retirement and benefit systems.
According to broker/consultant James Moore, when Stockton, CA filed for bankruptcy protection last year, then the largest municipal filing in the country, its workers' compensation obligations were secure because the city's program was fully funded as a stand alone program.
Detroit's case is much, much bigger though, and by early reports its workers' compensation program is not well funded.
I don't know how all of this is going to play out. Nobody does.
But I do feel confident that the support inherent in Michigan's workers' compensation system will continue to injured workers.
I hope I'm right.
Monday, February 27, 2012
A Bankruptcy Court Flirts With Dangerous Precedent
A very interesting legal fight is going on in Maine involving the bankruptcy of a self-insured employer.
The case is In re Irving Tanning Co. et al, No. 10-11757-LHK.
At issue is an attack on bankruptcy subject, Prime Tanning-Hartland's, set aside reserves for future claims.
The bankruptcy trustee wants to liquidate the reserves except for the amount that has been estimated as necessary to fulfill the outstanding claims obligations.
Those opposed to the plan (the Maine superintendent of insurance, the Maine Self-Insurance Guarantee Association, the Missouri Department of Labor and Industrial Relations and the Missouri Private Sector Individual Self-Insurers Guaranty Corp. have filed objections to the reorganization plan; Prime Tanning-Hartland had operations in both Maine and Missouri) say the move is unprecedented and threatens a precedent where self-insured reserve accounts may be fodder for future liquidations.
Apparently, according to the International Association of Industrial Accident Boards and Commissions (IAIABC), there is much more in the reserve account than the face value of the outstanding claims.
The liquidation plan proposes that the bankruptcy court estimate the total amount of Prime's present and future workers' compensation liabilities and then release any amount of security determined to be in excess of this estimate to Prime for payment to its creditors.
Objectors to the plan have some valid concern.
As we know because of our connection to the industry, it is very difficult to estimate the future liability of long tail claims, in particular those with outstanding future medical for catastrophic injuries.
Greg Krohm, a consultant for and former executive director of the IAIABC, pointed out that if the court's estimate under the proposed plan is too low, injured workers will be "left holding the bag." IAIABC's report notes, "adverse surprises are common in workers' compensation," since claims are "exposed to substantial swings in cost due to medical treatments, costs of care, and claimant life expectancies…"
I think worse, however, is that if this court action is allowed to proceed the availability of bonds to secure such reserves will either become uneconomical or unavailable.
Surety bonds are absolutely necessary for smooth insurance financial transactions in the self-insured industry. Bond-makers will not look at the self-insured risk as acceptable if there is the threat that, should an employer file bankruptcy, its surety bonds will be looked upon as the first line of guarantee for injured worker claims.
The case is In re Irving Tanning Co. et al, No. 10-11757-LHK.
At issue is an attack on bankruptcy subject, Prime Tanning-Hartland's, set aside reserves for future claims.
The bankruptcy trustee wants to liquidate the reserves except for the amount that has been estimated as necessary to fulfill the outstanding claims obligations.
Those opposed to the plan (the Maine superintendent of insurance, the Maine Self-Insurance Guarantee Association, the Missouri Department of Labor and Industrial Relations and the Missouri Private Sector Individual Self-Insurers Guaranty Corp. have filed objections to the reorganization plan; Prime Tanning-Hartland had operations in both Maine and Missouri) say the move is unprecedented and threatens a precedent where self-insured reserve accounts may be fodder for future liquidations.
Apparently, according to the International Association of Industrial Accident Boards and Commissions (IAIABC), there is much more in the reserve account than the face value of the outstanding claims.
The liquidation plan proposes that the bankruptcy court estimate the total amount of Prime's present and future workers' compensation liabilities and then release any amount of security determined to be in excess of this estimate to Prime for payment to its creditors.
Objectors to the plan have some valid concern.
As we know because of our connection to the industry, it is very difficult to estimate the future liability of long tail claims, in particular those with outstanding future medical for catastrophic injuries.
Greg Krohm, a consultant for and former executive director of the IAIABC, pointed out that if the court's estimate under the proposed plan is too low, injured workers will be "left holding the bag." IAIABC's report notes, "adverse surprises are common in workers' compensation," since claims are "exposed to substantial swings in cost due to medical treatments, costs of care, and claimant life expectancies…"
I think worse, however, is that if this court action is allowed to proceed the availability of bonds to secure such reserves will either become uneconomical or unavailable.
Surety bonds are absolutely necessary for smooth insurance financial transactions in the self-insured industry. Bond-makers will not look at the self-insured risk as acceptable if there is the threat that, should an employer file bankruptcy, its surety bonds will be looked upon as the first line of guarantee for injured worker claims.
What's more - this is a federal attack on the sole province of state jurisdiction.
Prime's lead attorney, Robert J. Keach of Bernstein, Shur, Sawyer & Nelson in Maine, dismisses the alarms and told WorkCompCentral that all claims "will be fully adjudicated and liquidated at the state level," and the bankruptcy court is being asked to "set aside enough money in excess of any conceivable amount to pay those claims."
Prime's lead attorney, Robert J. Keach of Bernstein, Shur, Sawyer & Nelson in Maine, dismisses the alarms and told WorkCompCentral that all claims "will be fully adjudicated and liquidated at the state level," and the bankruptcy court is being asked to "set aside enough money in excess of any conceivable amount to pay those claims."
Keach related that Prime was willing to "take the claims at face-value," and have the court base its estimate on the amounts the injured workers and their attorneys have demanded. "One would assume they erred on the high side," he said.
We have all seen civil attorneys flounder in workers' compensation proceedings to the point of malpractice. I have no reason to believe that a bankruptcy court judge or trustee would fare any better.
The court in this case is tinkering with dangerous precedent.
We have all seen civil attorneys flounder in workers' compensation proceedings to the point of malpractice. I have no reason to believe that a bankruptcy court judge or trustee would fare any better.
The court in this case is tinkering with dangerous precedent.
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