This post first appeared on Minyanville.
The race to be included in the government’s $700 billion financial bailout plan is starting to get a little absurd.
First, Treasury Secretary Hank Paulson offered to buy up mortgage-backed securities rotting away on the balance sheets of our biggest banks. When it became clear more immediate action was needed, he forced Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), Goldman Sachs (GS) and other big lenders to accept $125 billion in fresh capital.
Then, as the financial crisis deepened, MetLife (MET), Prudential (PRU), Hartford Financial (HIG) and other big insurance companies were rumored to be lining up for the government dole.
Next came General Motors (GM) and Chrysler, who are begging for billions from Washington to complete their merger.
Now, bond insurers Ambac (ABK) and MBIA (MBI) are nuzzling up to the government spigot, scrambling for their piece of the protective TARP. The Wall Street Journal reports the 2 firms are even vying to be part of Treasury’s plan to inject capital into troubled financial institutions.
Including the bond insurance industry in the bailout, Ambac and MBIA executives argue, would allow the firms to step in and insulate the rest of the financial industry from losses. Ambac called the potential impact “exponentially positive.”
The mere thought of including these firms in the bailout, frankly, is nauseating.
Ambac and MBIA personified the abject inability to assess risk during the credit boom, handing out bond insurance like candy on Halloween. Only theirs were the pieces parents warn their kids about: Snickers a la razor blades.
Their guarantees on debt ranging from municipal bonds to collateralized debt obligations allowed investors to ignore credit risk, use obscene leverage and rake in profits while adding next to no true value to the economy. When the bonds went sour, the firms' tiny cash reserves paled in comparison to their obligations.
As a result, hospitals, cities and countless other innocent bystanders had to scramble earlier this year just to make payroll as debt costs skyrocketed.
The bond insurers already had their chance for a bailout. Thankfully, their pleas have thus far fallen on deaf ears - and they haven’t gotten their grubby little paws on any taxpayer money.
With the government already considering a massive mortgage-guarantee program, bond insurers could be fearful their usefulness may have finally run its course.
And rightly so. It has.
Showing posts with label pru. Show all posts
Showing posts with label pru. Show all posts
Friday, October 31, 2008
Friday, October 10, 2008
Insurers Next In Line For Bailout?
This post first appeared on Minyanville.
Months ago, Citigroup (C) and Merrill Lynch (MER) kicked off what has now become a worldwide deluge of writedowns on mortgage and credit-related assets. It was believed at the time that losses would be limited to those securities tied to risky mortgage debt. This viewpoint has been proven false.
Now, as the credit crisis spills over into markets once believed to be virtually risk free, even conservative financial institutions are feeling the pinch.
The New York Times is reporting the insurance industry may be the next to see years of consolidations packed into a few short months.
Everyone knows about the troubles at American International Group (AIG), the world's largest insurer, which is now owned by Joe and Jill Six-pack (thank you, Governor Palin, for re-introducing this archetype to the lexicon). But it was believed that AIG was an insolated incident, that its unique exposure to the treacherous credit default swap market sealed its fate.
Troubling action yesterday in other larger insurers is turning that supposition on its head.
Prudential Insurance (PRU) fell more than 30% after warning profits would slump and indicating it may need to raise capital. Lincoln National (LNC) tumbled 35%, Principal Financial (PFG) lost 27% and Unum Group (UNM) dropped 30% in other southward moves within the industry. The group as a whole fell almost 17%, making it the second worst performing sector behind the automakers.
Analysts now fear mounting losses may force weaker hands to fold, as stronger firms gobble up smaller, less buoyant ones. Just as Wells Fargo (WFC) ultimately won out over Citi in the battle for Wachovia (WB), insurers with stronger balance sheets and more fervent risk aversion are likely to rise to the top.
It wasn't supposed to be like this.
Insurance companies, long believed to be safe and boring behemoths slothing their way through the dizzying world of highly rated debt, have been roiled by unprecedented dislocation in the credit markets. Taking in millions of tiny premiums each month, insurers invest that money in (supposedly) safe securities yielding low, but steady returns. The hope is that incoming cash flow offsets payouts on claims - and the firm gets to keep what's in the middle.
The Times notes that even as investment-grade debt has fallen in value this year, insurance companies have been loathe to write down their losses, hoping instead their investments would rise before year's end. But now that rolling over short-term funding is next to impossible, other assets must be sold to raise cash. Real losses on these sales are taking a toll.
Washington has its hands full trying to prop up the banking system, which sinks deeper into the abyss seemingly by the hour.
It's too early to know whether the insurance industry will be next in line for a government handout, but if the credit markets don't start to improve in short order, the queue in front of the Treasury Department's door could get a lot longer.
Months ago, Citigroup (C) and Merrill Lynch (MER) kicked off what has now become a worldwide deluge of writedowns on mortgage and credit-related assets. It was believed at the time that losses would be limited to those securities tied to risky mortgage debt. This viewpoint has been proven false.
Now, as the credit crisis spills over into markets once believed to be virtually risk free, even conservative financial institutions are feeling the pinch.
The New York Times is reporting the insurance industry may be the next to see years of consolidations packed into a few short months.
Everyone knows about the troubles at American International Group (AIG), the world's largest insurer, which is now owned by Joe and Jill Six-pack (thank you, Governor Palin, for re-introducing this archetype to the lexicon). But it was believed that AIG was an insolated incident, that its unique exposure to the treacherous credit default swap market sealed its fate.
Troubling action yesterday in other larger insurers is turning that supposition on its head.
Prudential Insurance (PRU) fell more than 30% after warning profits would slump and indicating it may need to raise capital. Lincoln National (LNC) tumbled 35%, Principal Financial (PFG) lost 27% and Unum Group (UNM) dropped 30% in other southward moves within the industry. The group as a whole fell almost 17%, making it the second worst performing sector behind the automakers.
Analysts now fear mounting losses may force weaker hands to fold, as stronger firms gobble up smaller, less buoyant ones. Just as Wells Fargo (WFC) ultimately won out over Citi in the battle for Wachovia (WB), insurers with stronger balance sheets and more fervent risk aversion are likely to rise to the top.
It wasn't supposed to be like this.
Insurance companies, long believed to be safe and boring behemoths slothing their way through the dizzying world of highly rated debt, have been roiled by unprecedented dislocation in the credit markets. Taking in millions of tiny premiums each month, insurers invest that money in (supposedly) safe securities yielding low, but steady returns. The hope is that incoming cash flow offsets payouts on claims - and the firm gets to keep what's in the middle.
The Times notes that even as investment-grade debt has fallen in value this year, insurance companies have been loathe to write down their losses, hoping instead their investments would rise before year's end. But now that rolling over short-term funding is next to impossible, other assets must be sold to raise cash. Real losses on these sales are taking a toll.
Washington has its hands full trying to prop up the banking system, which sinks deeper into the abyss seemingly by the hour.
It's too early to know whether the insurance industry will be next in line for a government handout, but if the credit markets don't start to improve in short order, the queue in front of the Treasury Department's door could get a lot longer.
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