Life Insurers Next in Line for Bailout
Now it’s the life insurance industry’s turn for a bailout, The Wall Street Journal reports today. The Treasury Department has approved allowing life insurance companies to participate in the Troubled Assets Relief Program, according to The Journal. A formal announcement should come within days. Life insurance companies that own federally chartered banks and thrifts will be eligible for the program, the story said.
Here’s the part that particularly interested me:
A number of life insurers, including Hartford Financial Services Group Inc., Genworth Financial Inc. and Lincoln National Corp., struck deals last fall to buy regulated savings and loans so they could call themselves banks and qualify for government funds. Hartford and Lincoln have applied for TARP funds. Genworth said it has applied with the Office of Thrift Supervision to approve its thrift purchase as a step toward gaining access to the federal funds.
In January, TWI reported on this development — but it goes beyond what The Journal reports.
Banking analyst Bert Ely told TWI that the insurers actually were teaming up with the Office of Thrift Supervision, which found them troubled thrifts to buy. That way, insurers could get a chance at TARP money – and avoid stricter federal oversight. Buying thrifts instead of banks would allow the insurers to be regulated by the Office of Thrift Supervision, which is well-known for its lax oversight. Thrifts, or savings and loans, operate slightly differently from banks (which traditionally focus on commercial loans, in addition to deposits, and are regulated by the Federal Reserve) because thrifts concentrate on mortgage and real estate lending — though the distinction has blurred in recent years. If insurance companies had purchased banks instead, they would be subject to stricter oversight by the Federal Reserve.
Now that Treasury Secretary Timothy Geithner has proposed a sweeping expansion of federal oversight of the financial regulatory system, the insurers’ OTS strategy might not work, anyway. But until any new system is in place, the insurers have found and exploited a regulatory loophole while no one noticed — and the move gives the OTS powerful allies as it fights to survive any new regulatory reorganization.
Here’s how Ely summed up the situation, from TWI’s story in January:
The notion of insurance companies buying thrifts to get government money and avoid stricter federal regulations at the same time should be troubling, Ely said. If the companies bought banks instead, they could still get TARP money – but as bank holding companies they would be subject to tougher oversight, including more stringent requirements for reserves set aside to cover possible losses, among other things. “I can’t help but conclude that plays a role in why these companies are going out and buying crappy thrifts,” Ely said. “This ought to be generating some questions and concerns.”
Apparently, it’s not generating enough questions to keep all the deals from going through. It will be well worth keeping an eye on what happens at OTS now. If it retains its authority as the Obama administration restructures the financial regulatory system, we’ll all know which powerful friends the office will have to thank for that.