Friday, November 21, 2008

The next shoe to drop in the labor market: the insurance industry

Asset managers, brokers, investment bankers, analysts and insurers alike will see massive job cuts into 2009. From Bloomberg:
"The bloodletting in the financial- services industry will accelerate in coming months, with job cuts doubling to about 350,000 worldwide by mid-2009, said Brian Sullivan, chief executive officer of search firm CTPartners.

Reductions on that scale would be equivalent to 20 percent of the global workforce at financial companies before the credit crisis began, said Sullivan, whose firm has worked with Citigroup Inc. and JPMorgan Chase & Co. Banks, brokerages and funds have eliminated about 170,000 positions worldwide."
The Americas' (the U.S.) financial industry has suffered the most compared to Europe and Asia, with already 0.9% job cuts in Q4, and according to Bloomberg, the worst it yet to come.

As of November 20, 2008, 95% of world financial job cuts occured at banks and brokerage houses. But insurers, with $US143 billion of the almost $US1 trillion in capital losses worldwide, are cutting jobs too. But if you work at AIG, your job is relatively safe. In spite of a record $US61 billion in losses, AIG has cut just 0.8% of its workforce.

Hartford Financial Services has tallied $US7 billion in losses to date - just 11% of AIG's losses - and cut 500 jobs, or 1.6% of its workforce. That is just wrong. But furthermore - and I find this very hard to believe, but nevertheless that's what Bloomberg says - Ambac Financial Group has cut zero jobs to date with an $US11 billion in accumulated losses.

The insurance business accounts for roughly 15% of world capital losses, but the job cuts have been minor compared to those at banks and brokerage houses. In aggregate, the insuarnce carriers, investments sector as reported by the BLS actually added 2,500 jobs in October. But that cant' last for long.

The next "shoe to drop" in the financial bloodletting of jobs will likely be in the insurance industry.

Rebecca Wilder


  1. Maybe Warren Buffett knows something we don't know since he has a large holding in Ambac. It is very weird insurance companies are not downsizing their workforceat the same pace as financials - maybe it is just a time lag like the domino cascade.

  2. Rebecca,

    Off topic, but did you notice the Liabilities section of the Fed's "Factors Affecting Reserve Balances (H.4)" Report?

    They repaid the Treasury Supplementary account $50b, and bank reserve balances went up by a similar amount. This implies they printed money to repay the Treasury, or rather they repaid them and did not sterilize it.

    By itself not a big deal, but there's another $500b to go on the Supplementary Account liability.

    Will they print it all?

  3. Hi David,

    Thanks for the comment! I hadn’t looked at the weekly statement yet.

    It looks like the Fed took back at least some liquidity from the Primary credit ($4 bill), PDCF ($15 bill), and the MMMF ($10 bill) markets, but it does look like reserve balances rose $41 billion in net on the TSFP ($50 bill) and “other” account ($12 bill). I suppose the Fed is in some sense monetizing the Treasury’s new debt, but these days, $50 billion is nothing, and unless it moves out of excess reserves balances, there’s no monetizing anything right now.

    Check out the surge in nonborrowed reserves – is this a positive sign? I mean, they are still negative, but they rose from -$260 billion to -$72 billion. Man, what a swing! This is the first time in I don’t know how long that the Fed balance sheet actually shrank. Shall we take that as a good sign? In this environment, I wouldn’t dare jump to conclusions.

    Thanks for all of your interesting and thoughtful comments!


  4. Hi David,

    A follow up: Total reserves surged from $416bill to $653 bill in spite of the surge in nonborrowed reserves. Banks are hoarding the Fed's liquidity measures - a point that I have made before, but it is really obvious in this H.3 release.


  5. The payment of interest on inter-bank demand deposits (IBDDs) was heralded as a panacea for monetary policy operations and control (see: Emergency Economic Stabilization Act of 2008). Subsequent to the laws’ enactment the aggregate volume of excess reserve balances held in the District Reserve Banks, owned by the member commercial banks, vaulted from $47bill on 9/17 to $634bill on 11/19 ( 12.5X gain –Board of Governors).

    According to dozens of “important papers”, reserve balances, and interest rate targets, are “inelastic” (the volume of excess reserves is independent or unrelated to the “trading desk’s” short-term interest rate “pegs”. Note: These interest rate targets (pegs) are now set by the FOMC operating under the introduction of it’s new “floor- system”.

    Note: Milton Friedman first argued that the central bank should pay market interest rates on all reserve balances (1959 – coincidentally?, coinciding with the change to include vault cash as bank legal reserves); (Scott Fullwiler “Paying interest on Reserve Balances” & “Divorcing Money From Monetary Policy” Keister, Martin, & McAndrews & “Interest on Reserves and Monetary Policy” Godfriend).

    The unpredictable, and incalculatable, consequence of diverting , and converting, bank deposits, into billions of highly-liquid, risk-free, interest-bearing reserve balances (IBRBs), has to date, been catastrophic. (It took Central Bank of New Zealand 3 months to transition to a “floor-system”).

    It is a widely accepted among economists, that legal reserves are no longer binding, or no longer restrictive (“Are U.S. reserve requirements Still Binding? “ Bennett & Peristiani) .

    Ironically, at the same time, economists cite that as the volume of (IBRBs) grows, the larger the capacity to offset, sterilize, or monetize, expansions in the Reserve Bank’s balance sheet (liquidity funding requirements).

    It seems that payment of interest on "excess reserve balances" is method by which the "trading desk" can raise commercial bank reserve requirements. The higher the volume of a bank's discretionary, or liquidity reserves, where highly-liquid, risk-free, interest payments are applied, the lower the banking system's expansion coefficient (assuming that reserves aren’t completely neutral/binding).

    Since 1942 bankers have remained fully "lent up", i.e., they held no unnecessary volume of excess lending capacity (excess reserves) to finance business (or consumers). Excess reserves were used to acquire a piece of the national debt or other creditorship obligations that are eligible for bank investment.

    Disincentive to loan or invest??? Has Bernanke, in effect, drained bank reserves??? Coinciding with payment of interest on reserve balances, the commercial banks have been experiencing bank credit contraction (fractional reserve banking in reverse). It would seem that if there weren’t credit worthy borrowers, then the portfolio composition might be skewed, but bank credit growth would not be.