Capco: WTF?

By Felix Salmon
July 31, 2009
Zachery Kouwe has a great article today about Capco, a highly-secretive Vermont-based insurer which looks as though it's massively insolvent:

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Zachery Kouwe has a great article today about Capco, a highly-secretive Vermont-based insurer which looks as though it’s massively insolvent:

By some industry estimates reviewed by the insurance department, Capco could face nearly $11 billion in claims but has only about $150 million with which to meet them. The state is examining whether the company sold policies without the means to cover them, according to a person with direct knowledge of the inquiry who had signed confidentiality agreements.

Capco was in much the same business as AIG Financial Products: selling insurance against the end of the world. Such businesses tend to be extremely profitable most of the time, and then blow up spectacularly. The question is who on earth would ever buy such insurance, given that the chances of ever getting paid out are slim indeed. The answer? The same people who own the insurer!

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 and its equivalent in Britain…

Capco, which is private, is something of a financial mystery. Its members include Wall Street giants like Morgan Stanley and Goldman Sachs, banks like JPMorgan Chase and Wells Fargo, smaller brokerage firms like Robert W. Baird & Company and Edward Jones, and Fidelity, the mutual fund giant. 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.”

It seems that these banks’ clients essentially got their Capco insurance for free, which is lucky, because it wasn’t worth anything. But that doesn’t mean they won’t go after Capco’s owners if the insurer fails to pay them what they’re owed. One thing’s for sure: a lot of lawyers are going to get a lot of work out of this fiasco.


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The non-working phone is a particularly nice touch. It’s evocative of the confidence games where the aftermath is a hastily-vacated office.

Posted by Ken | Report as abusive

ever hear about sarbanes oxley?

you remember that big government watchdog that was spose to protect Amerka from the likes of Enron……….

every business has to provide proof of insurance to every other business they do business with.

this was an end run around that rule………..

Posted by konnie | Report as abusive

I have to look into it more but I am seam to have recollection that former Vermont Gov Howard Dean was a big proponent of allowing lightly regulated “captive” insurerers such as CAPCO to set up in Vermont with limited disclosure requirement.


Posted by Tim Smyth | Report as abusive

When I called Fidelity in October following the “breaking the buck” freak out, I was told that SIPC plus Capco coverage protected my shares if not their value (as if the latter were an issue at that point in time). As of February: poof goes CAPCO.

I’m not generally one for the general free for all pile on Goldman and Wall St in general thing, but it seems that, to the extent that the remaining big banks and other CAPCO participants may have $11 billion unfunded liabilities emerging from Lehman litigation, that some of the YTD profits could have been steered to a recapitalization.

If anything, this should raises red flags for customers of Fidelity which, as a private company, is itself pretty opaque.

The name is a give-away; CAPtive COmpany. Traditionally captives have been used to avoid taxes or as a mean of asset protection (euphemism for cheating creditors). This time it is probably something else.

I know captives from the tax world, so this is at best a quallified guess. My guess is that it has been used to game Basel or similar rules the same way they did with loans that were transformed to CDOs or other papers with high ratings and lower demand of reserve capital than the original loanes.

If you want to save taxes or cheat creditors, you will be best served by a 100 % owned captive. If you want to game Basel, you probably will have to gang up with other companies that live under the Basel rules so each participant is a minority owner. The captive insurance company then sell insurance to it owners, and the rulemakers have decided that if you have insurance from a company that obey by the rules that govern the insurance companies, you have zero risk.

The most important rule for insurance companies is the rule that they must have enough funds to cover any possible scenario within a 99 % probability. It is for all practical purposes a version of VAR.

So the Capco structure could probably relive the participants for a collective reserve demand of lets guess 1000 by allocating 100 of capital split among them to Capco. Or they may avoid booking mark to market losses since they are insured.

Posted by Gaute Solheim | Report as abusive

That’s it. America is now officially Hooterville. Wall Street firms are switching hats like they’re Sam Drucker and they have the business ethics of Mr. Haney.

Posted by Jamey | Report as abusive

Don’t forget the government regulators who double talked more but did even less than
Mr. Kimball. ;-)

Posted by bonddude | Report as abusive


Many thanks. That was informative.

Konnie, your end-run comment says it all. Might add ‘ruse to circumvent the law’. Why bother with due process when this one shoud just be taken. No lawyers, just marshalls and vacuum cleaners.

Posted by DanO | Report as abusive

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