Friday, July 31, 2009

Potential Liabilities of Mysterious Insurance Company May Result in New Maneuvers to Protect Goldman and JP Morgan Chase

Customer Asset Protection Company, a little-known insurer whose members include Morgan Stanley, Goldman Sachs,, JPMorgan Chase and Wells Fargo, is becoming the focus of swirling questions as Lehman Brothers' bankruptcy filing puts it to the test.

The concern is that Capco, created to protect big-money investors in the event of a catastrophic failure of a major brokerage firm, has no chance to coping with the Lehman bankruptcy, NYT's Zachery Kouwe writes.

By some industry estimates reviewed by the insurance department, Capco could face nearly $11 billion in claims as a result of the Lehman bankruptcy but has only about $150 million with which to meet them, NYT writes.

How do you say Ponzi, in insuranceeze?

Capco was created in 2003 by Lehman and 13 other banks and brokerage companies as a kind of marketing tool. The pitch was that while Capco would not insure customers against investment losses, it would compensate them if the firms failed. Capco promises to provide virtually unlimited coverage above the $500,000 offered by the Securities Investors Protection Corporation.

How risky was this insurance? Even AIG refused to write it.

Capco was initially registered in New York but later moved to Vermont, where state law enables it to operate without disclosing much about its finances.

It’s unclear who actually serves as the current president of Capco, and the company’s main phone number connects to a recording that tells callers they’ve reached a “nonworking number at Morgan Stanley,” reports NYT.

To Charles Schwabs' credit they did not participate in the scam. Writes NYT:

Schwab requested the company’s financial statements from the insurance
department through a Freedom of Information Act request in 2004, but was told the books were confidential.

“Right away, the whole Capco thing just did not pass the smell test,” said Robert Meave, an outside consultant for Schwab at the time, who evaluated the insurance company. “Schwab was not about to go to their clients and tell them we’re providing account protection and, oh by the way, they were owners of the insurance company."

Bottom line, it doesn't appear the members were ever serious about providing coverage. It appears in many ways to be a sham insurance company used by the members so that they could tell clients their investments had unlimited coverage. When a client checked out Capco to see what kind of assets it had to back up such a claim and saw minimum assets, the members moved Capco to Vermont where it would be impossible for any other clients to discover the miniscule assets.


This sounds like check writing time, again, for Tim Geithner. The money exposure to Goldman, JPMorgan Chase et al. and the question about the legitimacy of Capco to insure such risk in the first place, means this will be nipped in the bud long before a claim reaches Capco.

Indeed, Senate Finance Committee, Robert Menendez, has already written Geithner and we can rest assured that Geithner's wonks are feverishly working to find just the right angle and dollar amount to protect Goldman and JPMorgan Chase from any blowback, monetary or otherwise.

1 comment:

  1. The house of cards is bracing for a storm. Shouldn't be long now. Running out of fingers to put in the dike.