I guess I should not be surprised that insurance companies want in, they’re the big holders of capital after banks:
The Treasury Department is dramatically expanding the scope of its bailout of the financial system with a plan to take ownership stakes in the nation’s insurance companies, signaling new concerns about a sector of the economy whose troubles until now have been overshadowed by the banking industry, government and industry sources said.
Insurers, including The Hartford, Prudential and MetLife, have pushed the Bush administration to include them in the plan. Many firms have taken losses from mortgage-related securities and other investments and are struggling to replenish their coffers.
Government officials worry that the collapse of a major insurer could further destabilize the financial system because of the crucial role the companies play in backstopping a wide range of financial transactions, although the direct impact on holders of car, life and other insurance policies would be modest, industry officials said.
I guess I’ll leave the question, "so why can’t they just go bankrupt, don’t they have trillions in assets and a whole market of debt insurance to cover this precise occurrence?" to finance experts and instead refer to my post on the AIG Bailout:
When an insurer goes under on the state level, two processes go into motion:
- The insurer goes into bankruptcy and a governmental conservator / receiver is appointed, like in the Thabault v. PriceWaterhouseCoopers suit, where the Insurance Commission for Vermont is the receiver for the defunct Ambassador Insurance Company.
- The insurer’s obligations are picked up by a state-run non-profit guaranty association, like The Pennsylvania Property and Casualty Insurance Guaranty Association (PP&CIGA).
The two then work in tandem, with the receiver trying to get money wherever they can and the guaranty association operating to ensure at least some compensation for the claimants against parties insured by the defunct insurer.
Both insurance receivers and insurance guaranty associations have a reputation for being aggressive. In Thabault, the Commissioner in Vermont just had a $182.9 million verdict against the insurer’s negligent accountants affirmed by the Third Circuit. In Pennsylvania, just last year PP&CIGA was reprimanded by the Pennsylvania Supreme Court for its “slash and burn approach to protecting PPCIGA’s assets." Carrozza v. Greenbaum, 591 Pa. 196, 215, 218 (2007).
Which raises a couple questions:
- Will AIG file for bankruptcy if the current credit facility is not enough to keep operational? Doing so will, as discussed above, likely result in a total collapse as counterparties abandon their obligations.
- Will the Federal Reserve attempt to use the insurance arm as a profit center to fund payments to the Federal Reserve or other creditors? Doing so imperils the reserve available for future claimants on the policies.
- Will the Federal Reserve sell off the insurance arm? Doing so imperils the Federal Reserve’s loan as well as the demands of other creditors.
That leaves the Federal Reserve balancing its own interests against those of claimants, the very sort of problem avoided by the normal receiver / guaranty association split. Who do you think will win out?
All those concerns apply here and more — what, exactly, is the government’s objective? To wind these down with minimal disruption to the economy? To save the shareholders? To ensure policies can be paid? To keep the insurer’s capital invested in the market? To avoid a bankruptcy that, but for a frozen credit market, would not have occurred?
I’m assuming the latter two are the primary objectives but, well, just like with the banks there appears to be no exit strategies.
So, congratulations America, we’ve bought ourselves a couple more insurance companies!
Having gobbled up the banks and insurance company markets, what’s next? In terms of size, next on the list are the oil companies, but they’re doing just fine, so I suppose we’ll move to conglomerates relating to consumer goods like General Electric, Wal-Mart and Altria, and we’ll keep going until we buy that business Joe the Plumber had in mind.