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<H2>Bailout expands into insurance </H2>
<H4 class=deck>Government would take equity stakes in several companies</H4>
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<P class=byline><SPAN class=name><A
href="http://www.spokesmanreview.com/news/bylines.asp?bylinename=David%20Cho,%20Binyamin%20Appelbaum">David
Cho, Binyamin Appelbaum</A></SPAN> and <SPAN class=name><A
href="http://www.spokesmanreview.com/news/bylines.asp?bylinename=Zachary%20A.%20Goldfarb">Zachary
A. Goldfarb</A></SPAN><BR>Washington Post<BR>October 25, 2008</P><!---------Code for Big Ads-------------------><!---------End Code for Big Ads------------------->
<P>WASHINGTON – 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.</P>
<P>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.</P>
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<TD></TD></TR></TBODY></TABLE>Government officials worry the collapse of a major
insurer could further destabilize the financial system because of the crucial
role the companies play in backstopping a wide range of financial transactions,
although the direct impact on holders of car, life and other insurance policies
would be modest, industry officials said.</P>
<P>The new initiative underscores the growing range of problems that Treasury is
scrambling to address with the $700 billion allocated by Congress this month.
The shape of the plan has changed repeatedly since Treasury Secretary Henry
Paulson introduced it last month as an effort to rescue banks by buying their
troubled mortgage-related assets. That original mandate has now been pushed
aside by a plan to take equity stakes in banks and insurance companies, and
other businesses are lobbying to be included.</P>
<P>The government has been forced to expand the plan partly because the federal
guarantees previously given some institutions, such as banks, have put other
companies and financial sectors at a disadvantage, making them less attractive
to uneasy investors.</P>
<P>The government's power to choose winners and losers in the crisis was
illustrated Friday when the Cleveland-based bank National City was forced to
sell itself when regulators turned down its request for a Treasury investment
after deciding the firm was too weak to save, according to people familiar with
the matter. Instead, the Treasury gave $7.7 billion to PNC Financial Services
Group to help buy National City. It did not require that the money be used for
new lending, the stated purpose of the government plan. PNC will become the
fifth-largest bank in the country by deposits.</P>
<P>The cost of saving the country's largest insurer continues to rise. Senior
managers at troubled insurance giant American International Group warned the
Federal Reserve Friday that the company would likely need more taxpayer money
than the $123 billion in rescue loans the government has provided, according to
two sources familiar with the private talks.</P>
<P>AIG is having a painful time trying to pay off bad bets it made guaranteeing
other companies' risky mortgage investments, which have lost much of their
value. Five weeks after the government launched an unprecedented bailout to save
the private company from bankruptcy, AIG has so far burned through $90.3 billion
of government credit.</P>
<P>The troubles at AIG highlight the difficulty of rescuing insurance companies
after they begin to unravel. Each week, AIG has faced multimillion dollar
collateral calls to pay off the mortgages and other assets it guaranteed,
sources said. The calls were triggered largely because AIG's credit rating was
sharply downgraded. The Federal Reserve of New York and AIG declined to comment
Friday on the talks or to characterize AIG's situation.</P>
<P>"In light of worldwide economic and financial conditions, we are in constant
conversations with the Federal Reserve," said AIG spokesman Joseph Norton, who
offered no further comment.</P>
<P>The move to rescue other insurers raises questions about how much the
government will need to spend to prop up the insurance sector and which part of
the nation's financial system might need help next.</P>
<P>"The big problem is whether the resources they've got available are
sufficient as they expand to more and more sectors," said Roberton Williams, a
budget expert at the Urban Institute. "Now that they're going to expand to
certain insurance institutions, is there enough money to cover that? And what
would be the next domino to fall?"</P>
<P>The Emergency Economic Stabilization Act approved by Congress and signed into
law Oct. 3 permits Paulson to invest in any financial institution, including
insurance companies. But when Treasury drafted rules for spending the first $250
billion to recapitalize banks, the program was limited to banks and bank holding
companies. In order to buy stock in insurance companies, Treasury officials
would have to redraft the rules for the program or create a new one.</P>
<P>Insurers lobbied federal officials for inclusion in the program, arguing in
part that it would "level the playing field" between banks and insurance firms.
An industry trade group and several insurance companies have met with Treasury
officials to discuss participation, industry sources said.</P>
<P>Several insurers Friday emphasized that their industry is less vulnerable to
the mortgage-backed securities and other complex investments that have damaged
the balance sheets of some banks.</P>
<P>A recent report by Goldman Sachs noted that many insurers are struggling to
raise enough capital to keep their credit ratings and meet regulatory
requirements. Several major companies report earnings next week, putting their
problems on public display.</P>
<P>"These people are not in the same precarious position as AIG, but it would
still be prudent for some of them to take on additional capital," Donn Vickrey
of Gradient Analytics said. "Given how large the losses are and how long they've
been building, they're running out of time."</P></FONT></DIV></BODY></HTML>