Insurers' Back-Door Bailout Bids Spark Debate
By DIANE LEVICK
The Hartford Courant
November 19, 2008
Life insurers are being called everything from "corporate pigs" to pragmatic capital-seekers as they try to tap billions of the U.S. Treasury's bailout funds.
They've touched off a scorching debate about whether they should get a piece of the action and how they're trying to do it — by buying small banks and applying to become savings and loan holding companies, as The Hartford announced Friday.
The list of companies attempting the same route grew Tuesday as The Phoenix Cos. in Hartford confirmed it is seeking such holding company status. It's looking for a savings association or savings and loan holding company that it might acquire, but it has not made a final decision on whether to apply for Treasury funds.
Other insurers have already said they're seeking money from the Treasury's program, which aims to encourage companies to lend more. The insurers include Lincoln National Corp., Genworth Financial, Protective Life, and Aegon, which owns Transamerica Life.
The feeding frenzy does not sit well with all financial services experts.
"As far as I'm concerned, the abuses of banks and insurance companies and private equity firms have largely led to this crisis," said Robert B. Lamb, adjunct professor of management and organizations at New York University's Stern School of Business, who studies the financial services industry.
"They've all participated in it, " Lamb added, "so paying money to them for them to salvage themselves when the rest of us are dropped into the void is not good management, not good governance or good planning."
Lamb thinks life insurers buying banks just to try for federal funds is a "manipulation" and "bending the rules, and they know it."
But Patricia A. McCoy, a law professor at UConn's School of Law, calls the bank-buying strategy and drive for federal money ethical. "It's aboveboard, and it's probably a good thing for life insurers' shareholders."
But McCoy added, "I'm not sure it's a good thing for the country as a whole."
The idea behind the Treasury's Capital Purchase Program was to boost the capital of healthy banks and other financial companies as a way of jump-starting lending. Nine of the nation's biggest banks have been allocated $125 billion — half of the $250 billion committed to banks. American International Group is getting $40 billion.
So only about $60 billion remains uncommitted of the first $350 billion installment in an overall $700 billion federal bailout plan.
The first priority for the money, McCoy said, should be to "make sure this system that we're putting so much faith in is on firm footing, and that's the commercial banking system." The second priority for the federal money should be to develop a program to restructure distressed home loans, she said.
But life insurers — whose shares have been pummeled in the stock market slump — are huge lenders that play a crucial role in the nation's economic recovery and deserve some Treasury capital, industry officials say. Life insurers hold 18 percent of U.S. corporate bonds. They have roughly $2.5 trillion of assets invested in bonds, and 38 percent of that is in corporate bonds.
In the economic turmoil, though, "insurers are hoarding cash; in recent months they've been retreating from their normal lending activities," said Jack Dolan, a spokesman for the American Council of Life Insurers.
Giving insurers new capital would open "one of the clogged arteries in the system" and "provides insurance companies with an incentive to participate in a market where there is great uncertainty and instability," Dolan said.
The Hartford plans to buy the ailing Federal Trust Corp. in Sanford, Fla., for $10 million and hopes to qualify for as much as $3.4 billion in Treasury funds.
The Hartford's president and chief operating officer, Tom Marra, said his company has been "fully transparent" in applying for Treasury funds and has followed the process the Treasury established.
The company is financially strong, Marra said in a written statement Tuesday. "However, given the potential for even more extreme market volatility, we believe that applying for capital through the Capital Purchase Program is a prudent route to pursue."
Dolan and others pointed out that the Treasury program is meant to pump funds into healthy financial companies, including insurers, to get credit flowing again — not to bail out failing institutions. The program was touted as an investment that would yield returns for the Treasury.
But public reaction to insurers' plans, such as online comments from Courant readers, has included "More corporate pigs scrambling to raid the Treasury," and "I've just become a savings and loan. Send me a check."
The issue is so sensitive that some officials aren't taking sides on insurers' reach for funds.
"As the crisis in the financial services sector evolves, it's important that Treasury uses the funds where necessary to make the economy work again for employers large and small, get people back to work, and protect the retirement security of millions of Americans," Rep. Chris Murphy, D-5th District, said in a prepared statement. He's a member of the House Financial Services Committee.
Sen. Christopher J. Dodd, D-Conn., and chairman of the Senate Banking Committee, said in a statement Tuesday, "The Treasury Department should evaluate the needs across the financial services sector, including the insurance industry, to determine which institutions should receive assistance."
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