The Hartford: The Truth About HIG

i don't want to make the people who've lately lost money in HIG feel bad. in fact, i'm hoping this will make them feel better by understanding what's really happening with HIG.
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tonight i was on yahoo message boards and that's what's sparked this latest blog. i saw people screaming and complaining about daytraders and shorters and how they're killing HIG. like it was all some dark conspiracy... gimme a break! you can't down a company this size with some lightweight pinksheet-style attack. yes, once blood is in the water, the sharks do come out-- but first, blood has to be in the water!
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so here's the deal. HIG was not brought down by a conspiracy of daytraders and shorters. HIG was not brought down by lifting the one-tick rule. HIG was brought down by some very bad bets its management made. they not only insured against a ton of defaults on commercial mortgages, but they did this with terrific leverage, which on one hand meant it could make a lot more profit with a lot less cash reserve, but on the other hand meant that if those bets went wrong, it could wipe HIG out in a hurry. and now, those bets have gone very, very bad indeed. an example is helpful....
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once upon a time, there was a savvy entrepreneur named janie. janie noticed that stores and factories near her sometimes couldn't make the payments on their lands and buildings, and sometimes they even went out of business. she learned that this is called a "credit default". janie began to wonder how the banks could stand it! it didn't happen that often and this gave janie an idea.
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so she went to a couple banks and said, "i will insure you against these defaults and you just pay me a premium for doing so." and the banks agreed. and janie started making money because she had calculated carefully how often defaults happen. her business grew and grew. but not fast enough for janie! janie noticed that there was soooo much market and she had soooo little cash to back her bets.
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so janie went to the state and feds and said, "hey, you can see my risk is very low in this business and these people really need the insurance, so how about you allow me to sell 'way more insurance than i've got cash to cover?" and the state and feds said, "okay." and thus began the leveraging. pretty soon, janie was making money hand over fist, and she went back and got permission for more and more leveraging. and she prospered mightily and even issued stock and bonds.
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then one day, people stopped shopping so much, and the malls and stores and factories began to default pretty fast. at last, one morning, janie woke up and found all these bankers and bondholders at her door with their hands out. "alas!" she cried, "i'm almost out of money--- i'm down to my last $500 million in reserves!" and right about this time the Big People who knew her company's condition began selling off janie's stock. and then there was great blood in the water, and pretty soon the sharks came along and made matters even worse.... and that's the basic story of HIG. not dark and conspiratorial, just plain bad judgement.
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disclosure: yep, i'm deep into HIG puts.