Waving a $700 billion bailout isn't exactly like waving a magic wand. Financial problems haven't disappeared—and there are signs the Troubled Asset Relief Program (TARP) may be creating additional, unintended market dislocations.
Insurers have stringent capital reserve requirements. Recent financial events have forced some to seek additional capital to offset losses tied to holding mortgage-backed securities and other investments to avoid downgrades in their credit ratings and risk losing customers. In addition, the current market downturn is increasing the costs of variable annuity payments for some life insurers and putting further pressure on their capital reserves. While some have turned to selling stock or parts of the business to raise capital, others are looking to TARP for help.
Under current Treasury guidelines, insurers (which are state-regulated) can qualify for TARP only if they are affiliated with federally regulated banks or thrifts. Presumably, some qualified insurers have applied for TARP funding. Even those not qualified for TARP but needing capital have found means to tap into the program: Within the last week, four insurance companies announced deals to acquire savings-and-loan associations and filed applications for savings-and-loan status with the Office of Thrift Supervision to be eligible for TARP funding.
These announcements signal a further shifting of Financials-related industries into the perceived haven of federal jurisdiction. To be sure, the insurance industry for the most part is functioning smoothly—and even issued a public rejection of government capital. But some insurers see participation in TARP as necessary to stay competitive with their peers and perhaps as a guarantee of aid if financial conditions worsen. After all, if free money is out there, why not see if you can't score a little? It's unclear what the effects of insurers becoming thrifts will be, but the capital offered by TARP is cheaper than market rates and could distort insurance markets, causing more problems down the line.
At this point, TARP is clearly in flux. The lack of clarity is attracting various entities looking for government handouts in the hope Secretary Paulson's shifting whims will eventually favor them—companies will jump through any sort of hoop for free funding. Insurers becoming thrifts is just another example.
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