TARP Bail-Out for Bad Business Decisions: Insurance Industry Edition

Keyser was once under the impression that it was a basic tenet of the capitalist system that it works by rewarding success and punishing failure. Seemingly, such a definition no longer holds true in the US.

Six major insurers, including The Hartford Financial, Prudential Financial and Allstate, received preliminary approval Thursday for billions of dollars in aid from a U.S. bailout fund, following a months-long quest by some in the sector for financial assistance.

The Hartford Financial Services Group Inc. was the first to disclose that it had been notified by the Treasury Department that it was eligible for $3.4 billion from the Troubled Asset Relief Program, or TARP.

Allstate Corp., Lincoln National Corp., Ameriprise Financial Inc., Principal Financial Group Inc. and Prudential Financial Inc. also are among insurers receiving preliminary investment approval, Treasury spokesman Andrew Williams confirmed. He declined to disclose the amount of investment each company will receive.

The $700 billion TARP bailout fund, approved by Congress last year, was originally intended to purchase toxic loans on the books of banks that were inhibiting their ability to make loans. But the fund quickly morphed into a capital backstop fund for banks that also was used by the Treasury Department to make loans to General Motors Corp., Chrysler and insurance giant American International Group Inc.

Life insurers also requested government aid, worried that their balance sheets had became clogged by illiquid assets and escalating liabilities to policy holders who bought in to this decade’s explosion in the variable annuities market. But a final word from the government was slow in arriving, and the stocks of most public insurance companies plunged in recent months.

The story notes that there’s only $10 billion left in this “keep losers from paying for their bad decisions” fund, but some (like Goldman Sachs) want to pay back their previous loans from this fund, and as Keyser recollects, one of the provisions of this “here’s a mind-boggling sum of money, don’t spend it all in one joint” fund was that the $700 billion limit was a permanent total, so as money comes back from previous losers in one door, it can flow out to further losers through another. Anyway, given the $180 billion given to AIG, the sums involved here are peanuts. In what crazy world is a $1 billion considered chump change?

As Keyser understands it, one of the checks on the functioning of the system is “moral risk.” That is, the sorts of risks that you’re willing to take are determined by who bears the consequences of bad decisions. The banks decided that if something went wrong, the government would bail them out, so what the fuck? “Hey, you, sir. You look you have a pulse. Would you like a loan to go buy the palatial mansion that you deserve. What’s that, you have no income? Just write down, ‘Self-employed.’ The place is bound to go UP UP UP in price, You’ll soon sell it for a big profit, and we’ll all make out like bandits. What could go wrong?”

Well, we now know what could go wrong, but if someone else is going to foot the bill, no matter how mind-bogglingly huge that may be, then there is no moral risk, and no reason to actually pay attention to the credit-worthiness of the people you lend to or to otherwise restrain yourself.

It’s not surprising that the administration is keen on this situation. As the saying goes, he who pays the piper gets to call the tune. In this case, it’s a very expensive tune, but the bill will ultimately fall onto the shoulders of future generations, so fuck them. Let’s party in the meanwhile!

h/t to appalled Lair reader Dr. Anton Phibes.