Hartford Tops List of Insurers Burned by Goldman's Fannie Sales

By Andrew Frye
Bloomberg News
July 16, 2010

Hartford Financial Services Group Inc. was the biggest buyer among U.S. insurers of the 2007 Fannie Mae securities offerings that were cited in a lawsuit against Goldman Sachs Group Inc., SNL Financial said.

Hartford wrote off its $211.1 million investment in Goldman Sachs's sales of Fannie preferred stock in September 2007 and December 2007, Tim Zawacki, an analyst with SNL, said today in a report. As a group, insurers spent $1.04 billion on the securities and reported losses of $802 million, SNL said.

Hartford was caught off guard by the 2008 financial crisis and needed a $3.4 billion U.S. bailout after investments soured. The insurer's losses on the Fannie Mae securities were more than three times those of rival Liberty Mutual Insurance Co., the Boston-based carrier that sued Goldman Sachs last week and said the bank misled investors in the offering. In 2008, Fannie Mae was taken over by the U.S. amid losses on home loans.

"Goldman Sachs knew or recklessly disregarded the actual status of Fannie Mae's capital structure," Liberty Mutual said in the complaint. The insurer said it invested about $62.5 million and that the stake became "virtually worthless."

Shannon Lapierre, a spokeswoman for Hartford, didn't immediately return a call. Hartford, based in the Connecticut city of the same name, repaid its government aid in March. Chief Executive Officer Liam McGee, who returned the insurer to profitability after taking over in 2009, said in an interview last month that the company is relying more on its own underwriting before buying securities.

Allstate, CNA

Goldman Sachs had said the offering was for surplus capital when it was actually needed to help Fannie Mae sustain its business, Liberty Mutual said in its July 8 complaint in Boston federal court. Michael DuVally, a spokesman for New York-based Goldman Sachs, said last week that the suit was without merit "and we will contest it vigorously."

Insurers that invested in the offering lost varying portions of their capital, depending on whether they sold the securities and when. Allstate Corp., the biggest publicly traded home and auto insurer, lost $30.9 million of its $70.3 million investment in the December 2007 sale, while CNA Financial Corp. lost $44.4 million of the $46 million it spent in the September offering, according to SNL. NYMAGIC Inc. made a profit of $400,000 on a $20 million investment in the December sale, according to Zawacki's research.

Maryellen Thielen, a spokeswoman for Allstate, and Katrina Parker, a spokeswoman for CNA, had no immediate comment.

'Significant Problems'

Goldman Sachs has come under fire from Congress and regulators for its underwriting and investments as mortgage markets collapsed during the credit crisis. The New York-based bank, Wall Street's most profitable, agreed yesterday to pay $550 million to settle a lawsuit by the U.S. Securities and Exchange Commission that claimed it sold a collateralized debt obligation without disclosing that a hedge fund helped pick underlying securities and bet against the vehicles.

At the time that it was underwriting the Fannie Mae offering, Goldman was aware that there were "significant problems" in the real estate market and bet its own money against subprime-mortgage-related securities, Liberty Mutual said in the complaint, which drew on documents collected by the U.S. Senate's Permanent Subcommittee on Investigations.

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