News that couldn't wait – Paulson considering bailout of insurance companies UPDATED Will US have a pot to pee in if Paulson keeps spending on his friends?

UPDATE: An afterthought of finding more versions of this story as I continued reading tonight is that a better title for this post might have been “Will the US have a pot to pee in if Paulson keeps spending on his friends?” (see the updated news below)

I picked the story up over at All finance and couldn’t wait wait to get it up – not to mention it makes me sick to think about Paulson using some of the taxpayers money to bailout the insurance industry’s bad investments.

The U.S. Treasury Department is studying how it could give relief to insurance companies under a $700 billion financial services rescue package, two sources familiar with the deliberations said on Friday.

Last week, the Treasury tried to squash rumors the government was preparing to give bond and mortgage insurance companies a capital injection. But senior officials are considering how the Treasury might be able to aid state-regulated insurance companies, the sources said.

The Treasury so far has used capital powers to aid only federally regulated institutions. But the program, known as TARP, could be used to buy sour assets from other financial companies and help them scrub their balance sheets.

It takes a sick mind to come up with TARP as the name of a program to bailout the insurance industry – CRAP would be my suggestion.

While there is no federal regulator for the insurance industry, which is regulated by states, some companies may qualify for aid because their parent holding companies operate under a federal charter. The Treasury Department has assigned a team to examine how it might deliver aid to the industry in a way that does not hit regulatory tripwires, the sources said.

The KBW Insurance index turned positive after Reuters reported the Treasury thinking. Life and mortgage insurers led the rise as shares of Hartford Financial Group jumped 16 percent and Genworth Financial rose more than 11 percent.

But not all insurers’ shares rose. American International Group Inc. which has said it expects it may be able to benefit from access to TARP, ended down 19 percent.

AIG was bailed out by the federal government last month and said on Friday that it has so far tapped the U.S. Federal Reserve for $90 billion. The insurer veered toward bankruptcy after mortgage-linked investments cost it $25 billion over three quarters.

MBIA Inc, the largest U.S. bond insurer, and its No. 2 rival, Ambac Financial Group Inc, met with regulators earlier this week to push for a way to tap into the government’s bailout plan.

New York Insurance Superintendent Eric Dinallo, the main regulator for MBIA, and Wisconsin Insurance Commissioner Sean Dilweg, Ambac’s primary regulator, convened in New York to discuss the matter with the firms.

Both companies have seen business grind to a near halt after large losses on mortgage debt guarantees and subsequent rating cuts.

A leading financial trade group on Friday sent a letter to the Treasury asking that the government interpret its new TARP powers broadly and leave the door open to aid for insurers, automakers and subsidiaries of foreign banks or companies.

“The institutions that are excluded play a vital role in the U.S. economy by providing liquidity to the market,” the Financial Services Roundtable wrote in a letter to TARP administrator Neel Kashkari. “The Roundtable would strongly urge that you permit such institutions to participate in the program.”

The Financial Services Roundtable represents major insurers, who are mulling whether the TARP program could be useful for them.

How disgusting! I hope I’m not sick all weekend.

UPDATE: Two additional stories complete the picture.  First, from CNSNews White House: We’ll Just Trust Our Treasury on Bailout – GFL!

The Department of the Treasury is set to buy $250 billion in stock in nine major banks and hundreds of smaller banks across America, with no timeline as to when (or if) those stocks will be sold back to the private sector.

While banks are not allowed to buy the stocks back for another three years, under the Emergency Economic Stabilization Act of 2008 signed by President Bush this month, the treasury secretary has full discretion on when (and whether) to sell the bank shares.

Treasury Secretary Henry Paulson plans to leave his post in January 2009, at the end of the Bush administration. A new secretary will come in with the new administration.

Asked if Bush thinks there should be a timeline or incentive for a future administration to sell the shares back into the private sector, White House Press Secretary Dana Perino said the Treasury Department is entrusted with the matter.

“The president is trusting his team at the Treasury Department to design this program, and he believes they are doing it the right way,” Perino told CNSNews.com at Thursday’s press briefing. “I don’t have details for you on it.  So, we’ll let them–we’ll just trust our treasury secretary and those he’s tasked with to implement the program.”…

Next, the Wall Street Journal U.S. Mulls Widening Bailout to Insurers

The Treasury Department is considering buying equity stakes in insurance companies, a sign of how the government’s $700 billion rescue program could turn into a piggy bank for a range of beleaguered industries.

The availability of U.S. government cash in the middle of a global credit squeeze is drawing requests from insurance firms, auto makers, state governments and transit agencies. While Treasury intended for the program to apply broadly, the growing requests could put a strain on the $700 billion, a sum that only last month stunned lawmakers.

MetLife Inc. and Prudential Financial Inc., two of the nation’s largest publicly traded life insurers, and New York Life Insurance Co., one of the highest rated insurers in the U.S., are interested in exploring a sale of equity stakes to the government, according to people familiar with the matter…

Insurers are critical to market stability. Signs of eroding confidence at life insurers could further dent fragile business and consumer confidence. Insurers are among the biggest holders of the nation’s corporate debt, with $1.3 trillion on their books. They are long-term investors, holding the securities for years, even decades.

As they’ve sought to shore up their own balance sheets in recent weeks, insurance companies, like banks, have retreated from this role as lender, instead hoarding cash, according to Robert Riegel, a managing director at ratings firm Moody’s Investors Service, which exacerbates the credit crunch.

Most insurance companies are financially sound but have seen their long-term investments and stock prices fall in value. Some have holdings of riskier alt-A and subprime-mortgage backed securities. Insurers have suffered losses in bond and preferred-stock holdings from the collapse of companies including Lehman Brothers Holdings Inc. Insurers also have been hit with billions of dollars in unrealized losses as corporate bonds of all stripes suffered big declines. Low interest rates have damped interest income and a prolonged economic slump could dent the variable-annuity business and even hurt sales of core life-insurance policies.

Insurers would normally tap capital markets to raise money. But many are loath to attempt selling common stock because their share prices have been so battered. That’s one reason many insurers have been pushing the expansion of Treasury’s equity-stake program to raise capital.

Treasury had already envisioned insurance companies using one element of its rescue program: selling bad assets, such as mortgage-backed securities, to the government. But Treasury officials are considering whether to buy equity stakes in certain firms, according to people familiar with the matter.

Under the terms of Treasury’s program, eligible insurers must be operated by either a financial institution holding company or a savings and loan holding company. The holding companies must also be regulated by a federal agency.

The investment funds would come from Treasury’s recently announced plan to invest $250 billion in U.S. banks. Treasury has already committed $125 billion to nine large banks. More than 20 additional banks are expected to receive equity infusions in coming days.

Treasury Secretary Henry Paulson asked Congress for wide discretion in the program. That’s prompting requests from myriad industries. Some want capital injections. Others want to sell troubled assets, such as bad loans, to the government…

For most of this year, the insurance industry seemed to be weathering the credit crisis. The industry has plenty of capital to pay policyholders, according to insurance regulators in two big states and senior executives at credit-ratings firms. But in recent weeks, the stocks of some of these firms have been slammed. More bad news is expected next week, when many of the large publicly traded life insurers report third-quarter earnings.

After Allstate Corp. released disappointing third-quarter results, Moody’s Investors Service lowered ratings on the company’s life-insurance unit to Aa3 from Aa2. The stated reasons included “the weakening of the [life] company’s intrinsic credit profile,” though it maintained the Aa2 rating for Allstate’s core car-insurance business.

The big ratings agencies have the life-insurance sector on “negative” outlook, anticipating a round of one- to two-notch downgrades, as companies brace for additional investment losses, weaker earnings and reduced financial flexibility. Many life-insurance products are pitched to consumers on the basis of an insurer’s financial strength, so moving to a lower rating can have an impact on sales. (emphasis added)

First, Paulson ditched Plan A  – the one he sold to Congress – in favor of Plan B (b is for bank) and now, it appears he’s branching out to Plan C…You have to wonder if we’ve got a lot of slow learners in charge and just how long it’s going to take them to figure out that putting money in banks won’t sell cars unless the people who want to buy them have j-o-b-s so they can make the payments.

I dare not write what I think about the government buying poor performing mortgage backed securities from an industry that left many of its own policyholders with a mortgage but no home – but you can guess.