Treasury to Extend Bailout Funds to Insurance Companies
By David Cho, Zachary A. Goldfarb and Binyamin Appelbaum
Washington Post Staff Writers
Friday, October 24, 2008; 2:38 PM
The Treasury Department is working on ways to broaden its $700 billion bank rescue program to help insurance companies that are a critical backstop to a wide range of deals, bond issues and leasing arrangements, sources familiar with the matter said.
Treasury is worried that insurance companies, many of which report earnings next week, could face similar fates as American International Group as the credit crisis worsens, triggering a new wave of problems for the financial markets. AIG nearly collapsed last month when it was overwhelmed by losses from real estate investments and derivatives, requiring massive government loans of more than $123 billion. It has already burned three-quarters of that money.
Treasury officials said today that insurance companies organized as thrift holding companies are eligible to receive money from the government because they are regulated by the Office of Thrift Supervision. Treasury has formed a team to specifically examine mounting trouble within the insurance industry.
But industry sources said that Treasury is also looking at ways to aid insurance companies that have no federal regulator. Many of these companies are subject to oversight by state authorities.
Concerns about insurers grew this week when Metro and other public transit agencies faced demands to pay billions of dollars to their banks as years-old financing deals unraveled.
Separately, Treasury plans to announce as early as today that as many as 22 regional banks -- including Capital One of McLean, Suntrust Bank and PNC bank of Pittsburgh --have accepted billions in capital injections from the government that are designed to spur lending and to drive consolidation in the banking industry, according to industry sources.
Other banks receiving government money include Regions Bancorp, KeyBank of Cleveland and possibly BB&T, which has a major presence in the Washington area, sources said, speaking on condition of anonymity because the announcement has not been made public. PNC already announced this morning that it would use the Treasury funds to help it buy struggling Midwest bank National City.
The new banks would join nine of the largest American banks, including Bank of America, Citigroup, and J.P. Morgan Chase, which were forced to accept $125 billion in funding last week.
The announcement of new participants in the bank investment plan is intended to reassure the public, politicians and investors that the Treasury is making progress. It is also meant to show that regional banks are now volunteering to participate and to help jump-start the economy. Regional banks are major lenders to mid-size companies.
But progress remains halting. The Treasury has yet to give federal money to the first nine banks because of continued legal wrangling over the details of the investment agreements. Assistant Treasury Secretary Neel Kashkari, the official responsible for the program, said in testimony before Congress yesterday that the next round of banks probably wouldn't get funding for "a few weeks."
Banks that accept government investments must agree in return to issue the government shares of preferred stock, which pay annual interest of 5 percent, and warrants for shares of common stock, which allow the government to profit as the company's share price rises. Banks also must accept limits on executive compensation and cannot raise dividends without permission.
Officials have publicly urged companies to increase their lending, to help revive the economy, but they privately concede that they cannot force banks to lend. Indeed, officials argue that for some institutions, the best use of the money may be plugging holes in the balance sheet or buying weaker banks.
Sources said that at least one bank that has applied for funding was denied by the government. As a result, banks that receive money are hoping investors will view the federal funding as evidence of good health. At the same time, investors may punish large regional banks that seem conspicuous by their absence from the next round of federal investments.