USAA’s anti-finreg campaign

By Felix Salmon
April 23, 2010
an excellent bank, and that structure -- which is unusual if not unique in this country -- puts it into conflict with the Volcker rule. Insurers, by their nature, invest in diversified portfolios of stocks and bonds, which is an activity which looks very much like prop trading if you're a bank. Since the Volcker rule would ban prop trading at banks, USAA is worried that it will fall foul of it.

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The Euro-style bancassurance business model has never really taken off in the U.S., but there’s one big exception: USAA, the financial services company for military families. It’s an insurer which owns an excellent bank, and that structure — which is unusual if not unique in this country — puts it into conflict with the Volcker rule. Insurers, by their nature, invest in diversified portfolios of stocks and bonds, which is an activity which looks very much like prop trading if you’re a bank. Since the Volcker rule would ban prop trading at banks, USAA is worried that it will fall foul of it.

But I’m not a fan of USAA’s reaction to this legislative threat. The CEO has sent out an alarmist message to all of USAA’s members, which is very light on specifics and which doesn’t even mention the word “insurance”.  I doubt that one member in 100 understands what he’s talking about when he writes that “the current Senate bill would disproportionally impact USAA because we are a unique and fully integrated association”. A follow-up blog entry isn’t much clearer.

The result is predictable, and can be seen in the comments at USAA.com:

It looks as though the government is taking control of all of us. Our freedom is going down the drain quickly.

I am for less government control. It is not good and nothing good will become of it. Let’s pray for deliverance from this evil.

The fact is that this entire issue could probably be addressed pretty easily by tweaking USAA’s corporate structure and making the insurer a different company to the bank. They could still cross-sell each others’ products, they just wouldn’t be liable for each others’ losses. It’s the sort of thing which makes quite a bit of sense even without the Volcker rule.

But instead of being constructive and helpful, USAA is being opaque and obstructive. I would have hoped for better from them.

18 comments

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Thanks Felix, I got this e-mail this morning and was wondering what they were talking about.

On the USAA site they’re slightly more clear that it’s about trading one’s own portfolio and is about the insurance business, but the letter is sadly high level, non-specific, and opaque. The message is: stop this it’s bad, not why, or what.

I do think you mis-characterize the comments in response to the release on the USAA site. You should go back and take another look.

So, Felix, tell us this: USAA is asking for a loophole or exception to “eliminate [the Volker rule's] effect on a company like USAA.” What other companies are like USAA and would benefit from the exception? All insurance companies owning a thrift?

Posted by kerguelen | Report as abusive

No doubt their credit rating depends heavily on the diversification those two business models give.

Split them up and funding costs go up (a la AIG) and their insurer strength rating goes down, which erodes a potential competitive advantage.

Posted by davew | Report as abusive

I got one too, thanks for the more lucid explanation. They want me to write my Congresscritter, something I am loathe to do because we desperately need financial reform.

Posted by Curmudgeon | Report as abusive

Felix,
The legislation does present problems for USAA and they should be concerned. USAA was established as a Reciprocal under Texas law. The bank was created much later as a Federal Savings Bank. They are a subsidiary and unless they spin off the bank, it is no simple matter.

Insurance companies investments are tightly controlled, but they are not limited to government securities. The investment portfolio provides much needed investment income.

You suggest that tweeking the corporate organization would allow them to get around the proposed laws limitations. The law is not that loose. If it were, Goldman, Citi, and BAC will be able to tweek their organization charts to get around it. In that case we should rewrite it anyway.

Posted by Skil01 | Report as abusive

It surprises me that the discussion focuses so closely on the proposed legislation, and ignores the obvious: Institutions run by honest people don’t need much regulation. And its corollary, institutions run by dishonest people will find a way around any law or system you can invent. If there is a lesson here, it is that we must punish the wrongdoers, not try to minimize the harm they do through more legislation and greater regulation. (Note to Mr. Salmon: This may be the reason many USAA Members see finreg and similar legislation as an abridgement of their freedoms. After all, USAA wasn’t doing anything wrong, so why should they be forced to change the way they do business?)

What seems clear from Mr. Salmon’s analysis is that there are many known ways to skirt around the bill, as proposed, if what you want to do is avoid the limitations in the new law. The self-serving, bad actors will do just that, and the USAAs of the world will not. Why? Because it is the right thing to do.

I regret (resent?) Mr. Salmon’s implication that USAA MEMBERS must be protected from our own ignorance. We don’t, because we aren’t.

“Congresscritter”!! Gotta love it.

Posted by E55 | Report as abusive

I got the same email this morning, but I’m not convinced by their case. I wrote this email to USAA, asking for more information.

This morning I received a missive from CEO Joe Robles asking me to contact my senator about blocking financial reforms that would harm USAA. At the heart of the issue, I am sympathetic — USAA is an institution I trust, and it certainly didn’t contribute to the recent financial collapse that is prompting financial reform legislation. But at the same time, I believe that some sort of reform is vital to the future of our economy and the security of our nation. As such, I cannot in good conscious ask my senator to simply vote against the bill. With more information, I may be convinced otherwise.

More specifically, I see that USAA is most concerned with the Volcker amendment. From what I have read on the topic so far, it strikes me as a wise restriction that would prevent the sorts of unregulated internal trading that lead to the recent financial crisis. How, exactly, would USAA be affected? What are the current activities at USAA that would no longer be allowed if the Volcker amendment becomes law?

Perhaps an exemption for USAA might be appropriate, but exemptions can be dangerous things once they become law. How can the bill exempt USAA without creating loopholes that would inevitably be exploited by Wall Street? I do not like the idea of exempting USAA by name — no company deserves a special, legally-enshrined exception to the law. Similarly, I do not like the idea of exempting such a narrow category that it clearly only applies to USAA. What sort of exemption would apply to USAA and other similar entities, but not to wall street corporations?

As it stands, I am not willing to ask my senator to vote against financial reform, even if the reforms will cost me money personally by affecting USAA.

However, if USAA could make a strong argument for some exemption, I could be convinced to write to my senator and ask for such an exemption.

Posted by lazybratsche | Report as abusive

It sounds like USAA is just trying to get a loophole for itself (and presumably, State Farm) written into the law:

“We’re just trying to ensure that the Volcker Rule, while still applying to a depository institution would not apply to the business of insurance,” says Wildermuth.

http://money.cnn.com/2010/04/23/news/eco nomy/usaa_volcker.fortune/

Posted by Mario_nj | Report as abusive

I should add that I’ve been a USAA member for the nearly ten years since I joined the military

Posted by Mario_nj | Report as abusive

Thank you lazybratsche. It’s a great idea to ask USAA for more info, and you wrote a great message. I’m going to crib from it and ask them for more myself.
I’m a second generation member, maybe even a third, I’m not sure, and I have great respect for the company. I was also so glad to be with them during the recent meltdown – they stayed solid as a rock. But it’s clear to me that regulations with some teeth is needed, and I don’t want to ask that it be loosened without understanding the implications.

Posted by mcgibbs | Report as abusive

Maybe USAA could have been more clear on the subject, but I would struggle to go so far as to say they are being obstructive. You attempt to smear USAA as being self-protective and alarmist, but how is additional government regulation and control a benefit for any member/client of USAA? What good has the Federal government done recently in the financial markets that would make us want them to have more control and create more regulation? You say that this issue could be “pretty easily” addressed by USAA, and while there’s probably some debate on that, the issue is why should USAA be forced to change this structure in the first place? It is immensely successful for USAA members (I am a member as well), and the ease of having the combined banking, insurance, and investments suite is preferred. I have to question your financial and political policies when your “pretty easily” addressed solution to this legislation is for USAA to drastically change the structure of their company, which could quite negatively impact the extremely competitive services that USAA offers and provides to it’s members.

Posted by Caleb15 | Report as abusive

Your blog post is a typical elitist, non-constructive response to USAA’s initial email and subsequent web post. It’s no wonder that we can’t have an intelligent conversation about complex issues.

As a member customer of USAA for 20+ years, I’m wondering why I should take on the burden of increased financial service costs associated with an unnecessary re-structuring of USAA. By the way, my reading of USAA’s email and web posts do not suggest that USAA is urging its members to urge its senators “to vote against financial reform” as suggested by other commentary here. It’s just advocating for an exemption for companies like USAA to the proposed Volker Rule. That’s a point that can be discussed in rationale, unbiased and non-emotive terms.

Your blog post is even shorter on details than USAA’s website and it’s pretty nonchalant about the impact to USAA and its member customers: “entire issue could probably be addressed pretty easily by tweaking USAA’s corporate structure and making the insurer a different company to the bank.” That’s a classic under-statement!! And, how would that affect USAA competitiveness and cost of services to its member customers?

Frankly, I’d expect some more in depth analysis regarding the impact to USAA and its customers from a blog on Reuters. Your “1 in 100″ statement is a pompous, air-bag substitute for real critical thinking, research and commentary. Many of us are not “looking for deliverance from this evil” of government. Many of us are just concerned that the one financial institution that we have some level of earned trust for will be inordinately impacted by this legislation. That’s a valid concern and should be treated with more respect and thoughtfulness.

You’ve got a long way to go to convince me that it’s a good idea to break up USAA for its member customers and the general public at large.

Try again, preferably with some facts and analysis. I’m open to all rationale arguments and evidence…

Posted by drldcarey | Report as abusive

Mr. Salmon, your attempt to paint all of USAA’s members as religious conservatives that don’t have any trust in government is despicable and dishonest, as is your portrayal of USAA as “opaque and obstructive.” Certainly it is each person’s own responsibility to learn as much as possible about a subject so as to formulate a valid and defensible opinion. Something perhaps you should make an attempt to do as someone who is published on a reputable news outlet. USAA is very clear in stating that they do not object to all financial reform, only the section containing the Volcker rule, as it is currently worded. I don’t see what is wrong with an organization lobbying its members to contact government representatives on their behalf. I am a USAA member AND a supporter of financial regulatory reform (and for full diclosure also a member of the Democratic party as well as Mr. Obama’s OFA). Having done a fair amount of research and thinking, I don’t see any conflict between my support of financial regulatory reform and asking for a rewording of the Volcker rule to exclude insurance company’s who are already regulated at the state level. USAA’s business model is an example for the rest of the industry to admire and learn from.

You, sir, should stop making grossly negligent generalizations.

Posted by conarx | Report as abusive

I’m still not sure that USAA can’t manage it’s business with the Volker Rule in place. Even after asking for clarification, their answer doesn’t convince me, a long time USAA member, that they need special attention. The original email listed three things that would change at USAA:

Prevent USAA from managing the association’s portfolio as we have for the past 87 years.

Jeopardize our ability to continue offering many of our competitive products.

Limit our ability to return money to our members. Last year, USAA returned $1.2 billion to our members in the form of distributions, dividends, and bank rebates and rewards.

I asked for a specific response to these three issues. The Volker Rule is what I get in reply. I would like to know how the Volker rule will prevent USAA from offering competitive products. Furthermore, how would the Volker Rule prevent USAA from offering distributions, dividends, and bank rebates and rewards? I can see how it may change how USAA has managed the institution for the last 87 years – but they’ve changed that a little along the way themselves. After all, USAA hasn’t always been a bank. Change can be good; it can force competition. Cream will rise to the top. I trust that USAA can find a way to compete in this new market and I believe they will do it legally and above board, just as they always have.

Posted by adrake | Report as abusive

Simple question: Could it be that USAA is only out to protect its profits? sure. But Is it also possible that USAA is right that this legislation would be bad? Sure.

Let’s slow things down. Congress should move slowly and for those of you who still remember the 1990 bank reform legislation helped lead to the 1992 recession (remember, Bill Clinton removed many of the restrictions imposed in that 1990 law when he entered office in 1993) This legislation could, if not done properly, cause us to fall back into recession or something worse. GO SLOW!

Posted by quill67 | Report as abusive

Discussing USAA knowledgably always fails for a lack of “proper terms” to describe the critter. Added to that is the background caterwauling of USAA members who seem ready to strap on the suicide bomber’s belt to defend Generalissimo Robles and the $13 + billion of subscribers’ money he bathes in each morning. Many of those staunch USAA supporters are actually shills and USAA employees paid by Robles to beat up on USAA critics. Their empty snide comments always give them away. USAA communiqués are always always always devoid of content: and Robles instant letter is a perfect example.

What exactly is USAA? United Services Automobile Association is an unincorporated reciprocal interinsurance exchange: a URIE. That USAA is a reciprocal exchange and only an interinsurance exchange is laid out in Article 1 Section 1 of the USAA Bylaws.

http://www.scribd.com/doc/30470439/bylaw s-15-nov-2008

An exquisite understanding of the unincorporated reciprocal interinsurance business model can be had in Dennis F. Reinmuth, The Regulation of Reciprocal Insurance Exchanges, Richard D. Irwin, Inc., 1967 (Library of Congress Catalog card No. 67-26286). The entire book (copyright released) can be downloaded here.

http://www.scribd.com/doc/30470892

Students of the reciprocal insurance exchange business scheme can gain a deeper understanding of the dangers of this business model to the subscribers by reading these two recent appellate decisions:

Fogel v. Farmers Group, Inc., 74 Cal.Rptr.3d 61 (2008) is current an ongoing after remand to the District Court:

http://www.scribd.com/doc/30471050

NB: the amended order which permitted Skadden Arps for Farmers to he declared just mistaken and not “perjurious” makes wonderful reading (see last page).

The other wonderful appellate decision is United States Court of Appeals for the 5th Circuit: 08-50782 True v. Robles, et al.

http://www.scribd.com/doc/30471114

This order (above) written by Judge Fortunato Pedro Benavides for the 5th Federal Circuit Court of Appeals lays out the extraordinary theory that Laura M. Bishop, the USAA Attorney in Fact for the 2.5 million canonical subscribers of the unincorporated reciprocal interinsurance exchange, is the only person with any operable, measurable, and practical accountability to the USAA members.

Judge Benavides order begs this question: Laura – where, exactly, is $16 billion which belongs to the subscribers?

I’d say that Ms. Bishop’s neck is on the chopping block.

Here are the 2008 regulatory finances for USAA.

http://www.scribd.com/doc/30471463

Go figure!

Hasta más tarde, Josue.

Posted by institutions | Report as abusive

The funds USAA primarily invests are reserves for insurance losses, unearned premium reserves, and subscriber savings accounts. USAA does not have shareholders, but has members who have given power of attorney to reinsure other members. Each year USAA pays out dividends on insurance policies. USAA retains money which it deposits to members accounts which are held for each member. These accounts can be used to pay losses should USAA have a need to do so. Unlike a Lloyds organization it cannot bill each subscriber should there be a catastrophe. Each member gets a statement showing them how much is in the account and also gets paid a dividend based on the balance in the account and on the “profits” of the association. The accounts are not allowed to get too big and excesses (based on the amounts needed in the aggregate) are paid to the members.

An exception can easily be written to exclude any reciprocal interinsurance exchanges regulated by insurance departments and their subsidiaries with more than 5 million members. I do not think there is another reciprical exchange out there.

People who speak of USAA’s profits, do not know what they are talking about. Members receive these. As a member I am concerned with the level of expenses and the amounts paid to management or spent on operating expenses. However, the expense level is probably one of the lowest in the industry. The members are generally happy with the organization. If a member is not happy with the organization they can cease all business with the association and ask for the balance of the member savings account.

Posted by Skil01 | Report as abusive

Skil01’s observations (immediately above ) are so replete with abject errors of fact so as to make us feel sorry for him/her.

The funds USAA “primarily invests” (to use Skil01’s terminology) are placed in its own subsidiaries and in USAA owned real estate: 55% to be exact.

http://www.scribd.com/doc/30520529

At the end of 2008, of $17.8 billion, General Robles and the USAA Board had invested $8.8 billion in the USAA subsidiaries and $1.1 billion in in-house USAA managed Real Estate. Thus $9.9 billion/$17.8 billion of total invested assets (at the end of 2008), or 55%, were mono-theistically invested “in house”. That ratio hardly conforms to a prudent man’s portfolio, “conservatively invested in securities which are marked-to-market and for which there exists a ready market”.

And the USAA Board has never presented to the subscribers a “fairness opinion” from one of the few remaining qualified investment bankers as to the market value of these “in-house” investments. “In-house”, in this instance, should not be confused with Bernie Madoff’s house.

As for the USAA Subscriber Account, well here is an actual example: why don’t we deal in facts and documents?

http://www.scribd.com/doc/30521174

Read the bottom of page 2 (above): carefully.

Now Skil01 tells us that the Senate bill causing all the brouhaha, S-3127:

http://www.scribd.com/doc/30514792/S-321 7-Annotated-for-Usaa-Flattened-w-Hot

should be written to “exclude unincorporated reciprocal insurance exchanges with more than 5 million subscribers”.

Well – that won’t help – because USAA has only 2-2.5 million subscribers: and we do not even know that number for sure:

http://www.scribd.com/doc/30518667/Roble s-as-the-USAA-Membership-Contortionist

As for USAA’s purported uniqueness: well that just ain’t so. AAA and Farmers are run along very similar lines and financially are of the same order of magnitude. Their finances may be inspected here.

AAA – http://www.scribd.com/doc/30522085

Farmers – http://www.scribd.com/doc/30522347

To close: there is one legal precedent, McAlexander v Waldbieser, 207 Ind. 531, 192 N.E. 425 (1934), which serves to demonstrate that “one aggrieved member” of an unincorporated reciprocal interinsurer can throw the entire exchange into a Texas Insurance Department receivership:

http://www.scribd.com/doc/30522692

There is food for for thought!

Conclusion: Read S-3127 carefully (above). It provides for the termination of USAA Federal Savings Bank’s charter – and we presume the forced conversion of the USAA I-Phone bank to a canonical National Association. S-3127 also proposes National Supervision of Insurers. USAA has always claimed in the past to support National Regulation of de facto national insurers like USAA. What happened to make Mr. Robles change his mind?

Posted by institutions | Report as abusive

Institutions – you seem to have animosity towards USAA and its CEO and AIF. Why so, what is your agenda? I appreciate the lower premiums, dividends, and excellent customer service. I’m concerned about reforms that are necessary due to others bad deeds now impacting a company that had nothing to do with it, and its customers who haven’t either. Prior to being in USAA, I had higher insurance premiums and higher costs to conduct banking transactions less conveniently. USAA has very much helped with my family finances and is greatly appreciated. And I believe people are getting very sensitive about the CEO asking for member help in pointing out our concerns about one provision in this bill and how it impacts the membership. It is not reactionary or political, we are simply stating our concern about proposed legislation and its impacts and hope that this would be addressed in a manner that addresses the necessary reform without the negative impacts of one provision.

Posted by GoVikings | Report as abusive