I went out for a quick morning walk this morning and looked down at my neighbor's Washington Post. While the story is a bit buried now at washingtonpost.com, the headline above the fold on page A1: Bailout Expands To Insurers. Insurers? What is going on? Per the Post:
The Treasury Department is dramatically expanding the scope of its bailout of the financial system with a plan to take ownership stakes in the nation's insurance companies, signaling new concerns about a sector of the economy whose troubles until now have been overshadowed by the banking industry, government and industry sources said.
Why did I choose the title "Government to insure market losses of rich" instead of strictly talking about the insurers? I'll explain below.
How do insurance companies work? Wikipedia's entry on insurance companies covers at a decent enough level for our purposes.
Insurers' business model:
Profit = earned premium + investment income - incurred loss - underwriting expenses.
Emphasis mine. See, the insurance companies collect premiums and then invest those premiums. Then they payout claims as they come in. A well-run conservative insurance company would be very cautious with their investments. However, insurance companies seek high profits. So they often elect to invest in more risky instruments. Per the Post:
Insurers, including The Hartford, Prudential and MetLife, have pushed the Bush administration to include them in the plan. Many firms have taken losses from mortgage-related securities and other investments and are struggling to replenish their coffers.
Emphasis mine again. See, the insurance companies, who have been making huge profits, had invested not only in mortgage-related securities, but other things, things like the stock market. In case you haven't been paying attention, the market is down a little bit. So the insurance companies no longer have enough cash to maintain their level of reserves. They are going straight to the government till, to get a handout. Essentially - the stock market losses of rich corporations are being insured by the taxpayers, while people like you, me, and my grandmother have just watched half of their life savings evaporate.
But it gets better. Or worse. Depends on your sense of humor. Remember how the bailout plan was supposed to get the credit markets moving again and stabilize the economy? Well, per the AP this morning, look at what the banks (and now presumably the insurance companies) are actually doing...
bankers might instead use the money to buy other banks, pay dividends, give employees a raise and executives a bonus, or just sit on it.
Really? Take our tax dollars and give bonuses instead of restricting them? Buying other banks instead of using the money to shore up their reserves? Surely, that couldn't happen. We put strict controls in that several hundred-page bill, right?
But once European governments said they were going into the banking business, Treasury Secretary Henry Paulson followed suit and diverted $250 billion to buy stock in healthy banks to spur lending.
Bank executives hinted they might instead use it for acquisitions. Sen. Christopher Dodd, chairman of the Senate banking committee, said this development was "beyond troubling."
Sure enough, a day after Dodd, D-Conn., made the comment, the government confirmed that PNC Financial Services Group Inc. was approved to receive $7.7 billion in return for company stock. At the same time, PNC said it was acquiring National City Corp. for $5.58 billion.
Well, at least we will put someone in charge of handling this program that would not have any sort of conflict of interest, right?
The challenge was made plain when the Treasury hired the Bank of New York Mellon Corp. as "custodian" of the troubled assets purchase program. The bank will conduct "reverse auctions" to buy the toxic securities on behalf of the Treasury. The lower the price they set, the better chance sellers have of getting rid of the devalued securities.
On the same day it hired Mellon, the Treasury also picked the company to receive a $3 billion investment as part of the capital-infusion program. The same bank hired to help manage part of the economic rescue plan became a beneficiary of it.
Shoot me now.
Or let me get my piece of the bailout. I don't need billions, just a few grand to make up for what I lost in my 401(k) and a bit more for my other investments. I bet for well under $1 billion we could repay all the losses of all the folks who read DailyKos. Then people like us could do important things like donate to our favorite candidates, or spend money and get the economy going again.
But we can't do that. That doesn't follow free market principles. Protecting rich people from stock market losses, however, is the bedrock principle upon which America has been built.