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USAA and financial regulation

A couple of you have asked me about USAA's strong opposition to any financial-regulation reform that includes the Volcker rule. USAA is a financial-services company that serves military families and that's structured in a fairly uncommon way: It's an insurer that owns a bank. The Volcker rule, which is trying to keep traditional banks that hold customer deposits from making risky trades to pad bank profits, could pose a problem for this sort of a bank. I don't know enough about USAA's situation to say anything very specific about it, but Felix Salmon took a look and thinks this should be pretty easy to overcome.

By Ezra Klein  |  April 23, 2010; 4:00 PM ET
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"I don't know enough about USAA's situation to say anything very specific about it."

Congratulations on an honest statement. You should have stopped there. From reading Felix Salmon, it's clear he doesn't know enough either. Unfortunately, Felix offers this gem:

"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."

Felix doesn't know. He's just guessing.

The insurer is already a different company from the bank.

Posted by: veryinterested1 | April 23, 2010 4:17 PM | Report abuse

It would apply to any affiliates of any financial holding company that owns a bank or thrift. So, yes, this is a fairly big deal for insurers that meet that definition. And USAA is not in any way "unusual" among them. Other insurers that own a bank or thrift: State Farm, Allstate, Prudential, MetLife, MassMutual, Hartford, Principal, Ameriprise, Mutual of Omaha -- it's actually a fairly extensive list, particularly on the life insurance side.

Posted by: raylehmann | April 23, 2010 4:50 PM | Report abuse

Felix Salmon nailed it. Just because USAA wasn't caught up in the recent economic downturn doesn't mean that the safeguard that the Volker Rule would institute isn't reasonable for them as well.

USAA's insurance operations, like all insurance operations, generally invest their cash in a relatively aggressive fashion. To the extent that losses on those investments could affect their banking customers and/or require action by the FDIC, putting a firewall between the insurance operations and banking operations make sense.

As a member of USAA, I too am disappointed with their CEO's reaction to the Volker Rule.

Posted by: cjo30080 | April 23, 2010 6:01 PM | Report abuse

I too was puzzled by the lack of specificity by the USAA CEO in his letter to all of us USAA members. USAA is a very unique critter - it is first and foremost a cooperative which focuses on a variety of financial services. Its membership comes from the military (formerly was only officers) and its genesis was back in the days when Army officers were so low status that they were in essence uninsurable by mainstream insurance outfits. I wrote my Senators, but providing much more context and support for financial reform than USAA provided themselves in their draft letter (which by the way wasn't editable if you used the USAA automatic grassroots generator). USAA is a wonderful organization and it never ceases to provide mirth that I'm in an essentially left-wing structure (cooperative) with a heavily (though not completely of course) right-wing membership (military families). Any USAA members should join the discussion on the USAA webpage, much of it is very thoughtful, though there is a share of right wing foolishness about big government (which of course doesn't include the DOD by definition). Regardless, the unique structure of USAA combined with high ethical nature of the company could provide some models on how to do financial services that provide social good.

Posted by: alan24 | April 23, 2010 6:22 PM | Report abuse

Thanks for addressing this, Ezra. Though I'm still not clear on the situation after reading Salmon's piece and the comments. His commenter lazybratsche shared the detailed request for more info they sent back to USAA. I think I'll do the same. I would want to act if the company, which has been responsible and serves its unique customer base well, is indeed unfairly threatened by the regulations. But I sure need to hear more than what was in the CEO's message.

Posted by: mcgibbs | April 23, 2010 8:12 PM | Report abuse


I am not sure you are correct about the insurer being different from the bank. USAA is an association (like a cooperative) that was started for self-insurance and moved into bank later. If the entities already were distinct, the Volcker Rule would be a moot issue: not the CEO was very oblique about his concerns.

I am cynical enough to think USAA is being used a trojan horse to fight the regulatory effort. USAA is highly respected by those around the military, getting a majority of those close to the military to fear the bill is very, very shrewd politics. Read the comments at USAA website for more of this. I fear these people are being played.

Posted by: NotStephenGlass | April 23, 2010 9:43 PM | Report abuse

United Services Automobile Exchange [USAA] is an unincorporated reciprocal interinsurance exchange - as per Article 1 Section 1 of its own Bylaws. USAA is neither a cooperative nor a mutual. The 2.5 million true members of USAA are the subscribers to the exchange: these 2.5 million active and former military officers cross-insure each other with reciprocal insurance agreements. Farmers Insurance and AAA Auto Insurance operate in a similar manner - but with significant differences in how they are capitalized. The USAA exchange is operated by Laura M. Bishop who is the Attorney in Fact for the 2.5 million subscribers. Ms. Bishop, according to Judge Fortunato P. Benavides (5th Federal Circuit Appeals) in True v Robles is directly accountable to the 2.5 million subscribers. Expressed most properly, Ms. Bishop is the executor of a trust granted by the subscribers. The subscribers are the principals. Laura M. Bishop is the agent.

Now - why is Generalissimo Robles concerned about FDIC regulation and oversight? The answer is actually quite simple.

Robles understands that when the FDIC rolls into San Antonio that they will discover that Laura M. Bishop, and her predecessors Robert G. Davis, Robert T. Herres, and Robert F. McDermott have breached their primary duty under the reciprocal insurance scheme - which is to return each year’s unneeded premium deposits to the subscribers after all claims are settled. Rather than returning subscribers’ funds at year end – Robles has gotten in the nasty habit of allocating the subscriber dividends into what he calls Subscriber Accounts. The IRS permits Robles to retain these funds in a tax advantaged manner as long as money is kept in subscriber accounts notionally titled with the subscriber’s individual name. That way - the money in those accounts is still the subscribers’: sort of.

Now – all would be fine if Robles had kept these trust funds segregated, in gilts, and had used them solely for window-dressing. But instead, Robles has spent the money –and the money is now gone.

As USAA’s auditors, E&Y, by their own admission, have not tested the Robles accounts for fraud – we do not know whether Robles is doing what comes naturally to such a deep thinker in such circumstances where phantom earnings can be conjured up with no tax liability. Mr. Robles should simply tell us than he is not creating phantom USAA members and fake profits, and then warehousing those phantom profits in the tax-exempt subscriber accounts. If all is Kosher at USAA, then Robles has nothing to fear from the FDIC. But my read is the lady doth protest too much.

Posted by: usaa_critic | April 25, 2010 1:46 AM | Report abuse


My Subscriber's Account is supposed to contain a hefty amount of money, and now you are telling me that it is likely as empty as Sarah Palin's head. Do you have any proof for that assertion? I think very highly of USAA, though Robles' e-mail was so devoid of detailed info that it caused me to question his motives and those of USAA. Could you provide more info? Thank you

Posted by: OIFVet | April 25, 2010 12:17 PM | Report abuse


As a member, my subscriber savings account is also large. The account is part of net worth. By paying amounts into the SSA, USAA does not pay income taxes on this income. The money is deemed by the IRS as a return of premiums. By not actually sending you a check, USAA has it available should there be a catastrophe. Should California fall into the Ocean and reinsurance not be enough to cover losses, the SSA accounts would be at risk.

As a Reciprocal Interinsurance Exchange its members, in effect, insure each other. However, the association is non-assessible. That is if the Big One comes, and reinsurance is not enough, we may lose some of the SSA funds, but they cannot come after us for more funds.

By the way, USAA may still pay some income taxes from activities that are not part of the reciprocal.

I have never worked for USAA, but have been a member over 40 years and spent 25 years in finance and insurance. USAA is one of my best decisions. I am amazed by some of the assertions made on these blogs. At least Mr. Klein stipulated that he did not know. Mr. Salmon is not correct.

Posted by: skiltonr | April 25, 2010 2:27 PM | Report abuse

As a 21year-old Air Force 2LT in 1952 I was able to obtain auto insurance thru USAA after being canceled by my home state insurance company. I have had excellent service from USAA for over 58 years. My subscribers savings account grows each year and no other insurance carrier can match USAA rates. USAA as an entity may not be perfect but it has served me and my family extremely well.

Posted by: alheuss45 | April 25, 2010 6:20 PM | Report abuse


You say: “My subscribers account is supposed to contain a hefty amount of money . . . “

It is up to your attorney in fact, Laura M. Bishop (read the signature on your policy) to supply you with evidence that your “hefty amount of money” is intact. It is she who collected your “premium deposit”.

Page 3 of Laura M. Bishop’s 2008 NAIC Filing - 2008 Statutory Statement of Surplus – shows the total amount held back from the subscribers’ dividends on December 31, 2008. About $8 billion.

Is that “hefty amount of money”, $8 billion, held in escrow? I do not think so.

Here is page 1 of Ms. Bishop’s NAIC report which shows USAA’s Statutory Assets:

Are the assets purchased with your $8,000,000,000 segregated from the other assets? In other words, are the assets that Laura M. Bishop permitted the USAA Board of Directors to purchase with your hefty amount of money earmarked to repay you? I do not think so.

So where was the $8 billion at the end of 2008: which is probably about $9-$10 billion at the end of 2009? Where is your hefty amount of money?

I’d say that is a darned good question. And which assets will be sold when it comes time to pay you back? Or will the money to pay you back have to come from new subscribers? Hmmm.

PS: And why is General Robles so anxious to avoid having the FDIC look in on this matter? S-3217 declares that since General Robles applied your subscriber account to finance a huge bank that USAA is now no longer just an unincorporated reciprocal interinsurance exchange: USAA is now also an unincorporated financial services holding company. Did you know, sir, that you personally, are an owner of a bank? Legally – you are a financial services holding company. Is the ownership of a bank, about which you know absolutely nothing . . is your ownership of that bank "ultra vires" to the ambit of Ms. Bishop's powers in the trust you granted her when you signed your subscriber agreement? Anybody can sign in on the internet and open up an account in your bank. Your bank is paying the highest CD rates in the country. That is not necessarily a sign of financial strength.

Posted by: usaa_critic | April 28, 2010 12:40 PM | Report abuse

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