TCS Daily


TARP the Life Insurers? This Is Nuts

By Larry Kudlow - April 13, 2009 12:00 AM

Is bailout nation about to strike again? Sure looks like it. According to a bunch of front-page news stories, life-insurance companies are about to get TARPed. This is nuts.

The public is clamoring for an end to TARP and bailout nation. That's a key message coming from the heartland tea parties that are cropping up spontaneously around the country. This is turning into a real populist uprising against rising taxes (especially state, local, and property taxes), TARP, and all the federal bailouts -- and the trillions of dollars of deficits and debt being used for financing.

If Team Obama ignores this uprising, it has a political tin ear.

While commercial banks of all sizes are increasingly profitable and want to pay back their TARP money, the Treasury Department is now proposing to extend bailout funds to life-insurance companies, most of which are in no danger of failing. And for those that are in danger, surely it's time for a bankruptcy proceeding instead of more taxpayer money.

We are already on the hook for banks, GM and Chrysler, and lube jobs for guaranteed government-backed GM warranties. And the banks themselves may go to war against an Obama administration that wants to maintain control over the big-bank sector and prevent these financial institutions from paying down TARP. It's as if Team Obama is saying, "Don't worry about the taxpayers. Just keep expanding government control over the economy."

And now comes life insurance. But when will this country stop saving losers and start rewarding winners?

Meanwhile, no one has proven that life-insurance companies constitute true systemic risk to the financial system. No one. This is nothing but a bailout. Actually, it's a precautionary bailout, since none of these insurers has failed.

Despite the stock market rally and proliferating signs of an economic comeback, a new TARP regime is being prepared in case insurers lose more money in their stock portfolios, or their bond investments, or their residential- and commercial-mortgage purchases. (By the way, corporate bonds -- which are heavily owned by life insurers to pay out retirement contracts -- are rallying big time, with prices rising and yields declining.)

But for those insurers who may lose money on their investments, tough luck. A lot of these insurers own variable annuities, which are retirement products that guarantee minimum returns no matter what happens to the stock market. Most of these products won't come due for ten years or more. And the break-even point is something like 600 on the S&P 500 index, which is now above 850 and rising.

Not all life insurers would be eligible for bailout funds -- only those that own federally chartered banks or thrifts, like Hartford Financial, Genworth, Prudential, MetLife, and Lincoln National. But a recent Wall Street Journal article indicates that a number of life insurers are doing very well and still have triple-A gilt-edged ratings. These include MassMutual, New York Life, Northwestern Mutual, and TIAA-CREF.

A senior executive at a large Midwestern insurance company e-mailed me to say he's against an insurance-industry TARP: "Those that are in trouble, including Conseco, Genworth, Phoenix, The Hartford, etc., should go the way of the dodo bird. Imagine some Treasury bureaucrat investing your 401(k) or retirement-plan money, or worse setting prices on your insurance policy."

A recent Bloomberg accounting of the federal financial-rescue package puts the grand total at $2.5 trillion for taxpayers on the hook. That's a lot of future debt. And that total does not include the Federal Reserve's $1.7 trillion, which is about to grow by at least another $1.5 trillion. It's unclear right now how much money the life insurers might get from TARP. And with members of Congress on recess -- and undoubtedly hearing a mouthful from constituents who are fed up with bailout nation -- it remains to be seen if our elected lawmakers will actually back up the Treasury's life-insurance bailout.

But is there any limit to this administration's intentions to interfere and perhaps control large swaths of our economy? And do these life-insurance mavens know what they're getting into by going on the hook to Congress? And does anybody remember that free-market capitalism is about success and failure?

Just say no to expanded TARP for insurance companies or anybody else. That's the real message of the homegrown tea-party revolts against bailout nation and the higher taxes, deficits, and debt being used to finance it. Folks are trying to tell Washington on the April 15th tax day that enough is enough. They can't take it anymore.


This article first appeared on Kudlow's Money Politic$.
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26 Comments

(Grammatical) mistake in the article; replace "for and end to TARP" with "for an end to TARP"
Just when I thought I don’t need to be a proof-reader anymore!

mabybe national it
I guess a lot of liberals will suggest that they just nationalize that whole sector. If the government thinks it can own and run the car business, why not life insurance?
There would be no problem with all the employees at those companies they could all become civil servants. Indeed they would probably have to hire many thousands more too since we know that government agencies always have far more employees than private business.
If they want banks nationalized, why not life and car and house insurance?

Correction
Thanks for noting that. The correction has been made.

figured out
Yeah, I think they figured it out and there is a proposal to make the nationalized insurance company of division of the US Post Office, the one that can't even deliver the mail on time, and whose amount of lost mail is a state secret.
Others propose that FEMA could do a better job, while some are adamant that it should be the DEA's job considering their success with the war on drugs.
If Social Security took it on it might become another ponze scheme, just like SS, and would be illegal for a private company.

Others say that there is no need for any insurance company at all, because if the US just had a more complete nanny state, everything that could happen to people would be subsumed under other welfare programs.

We can't take this any more...we never should have tried...
The US government is not large enough to underwrite the losses of our banks and non-banking financial institutions too big to be allowed to fail. We learned on September 15th the lesson with Lehman Brothers that many of these immense players have too many liabilities to default on without dropping global capitalism to its knees. We have now learned what many of us said in 1974 when I was in school that this economy was already too large then for the government to "make" it do anything. Of course, the government can shatter the economy relatively easily. Because stupidity goes straight to the bone.

The only solution is for the government to simply seize those banks and non-banking financial firms that are too big to fail and that cannot demonstrate without any doubt that their Balance Sheets are sound. Beyond any reasonable doubt. That must be the test.

Then the government can indeed fix this thing. Otherwise, the government is just not big enough. In the end we will be out all this money and the economy will not have returned even to the 2.1% annual GDP expansion we enjoyed from 2001-2008. We will more likely recover...when we do recover...to the 1% annual GDP growth that has been the Japanese economy for the past 17 years...and we will still be out all that money.

Nationalize your banks Mr. President. Let them call you a Communist for it. You will only fail to get reelected if the Republicans can find someone to run against you...and the Republicans can't find their butts with both hands these days.

So do the job. Take your lumps. Be a man like George Bush was when history gave him hard decisions to take. Wrap yourself in the flag. Make us proud.

Whoever has too much paper they cannot understand...
You guys forget. Those CDO's were purposefully make impossible to understand. By large teams of the best lawyers who ever lived. Each CDO was supposed to trade as a buffered, homogenized assembly of tranches exactly like every other CDO. So they have now...as a class of financial assets...violated the technical limits of the model defining their performance and behavior under all projected market scenerios. They are shattered and they cannot be reasonably valued. The entire lot of them must be swept up as one, their coventants must be violated legally, their tranches must be reassembled into the underlying debt instruments and each of those must be dispositioned. Some of this stuff is still performing, some has collateral to be foreclosed and some of the assets are not worth the paper they were written on.

This cannot be fixed until the CDOs have been teased apart, salvaged and liquidated. Immediately, the surviving banks should go back to the private sector.

The bankers themselves know this must happen in the end and that is why they are holding onto their cash, giving back the TARP already and lying through their hats that they are profitable again.

But is there any limit to this administration's intentions to interfere and perhaps control large sw
In short. No.

These guys are committed socialists who believe that nothing works well unless it is run by govt.

can't take it any more
I see you're accepting my suggestion of nationalizing the banks. But you didn't mention whether it should be the post office, FEMA, or the DEA that runs them.

If you say that of course those dysfunctional organs of government waste couldn't do it, then do you imagine that anyother new agency made in their image would do better?

If you suggest that it's OK to call the prez a communist for doing a communist move like that, do you also not mind being called a communist? We already have many of the ten pillars of communism, do you want all of them?

the answer is NO
It's no because they will create another 'crisis', and demand more power for themselves to fix it, just like they always do.
Governments can't really get away with just demanding more power because that would be too transparent, so it's the most convenient for them to create problems.

Call me a Libertarian Communist...if that makes any of you feel better...
Just like when the FDIC takes possession of a failed bank for a minute and places it under a brief conservatorship...the government needs to be able to take control of a bank or any non-banking financial institution that has for-all-practical-purposes already failed but for a government bailout and that is simply too central to be allowed to default on its liabilities. This can be John Hancock, Berkshire Hathaway or General Electric, for that matter...anyone organized as a financial firm and everyone owning a financial firm has put humself at the mercy of our government if he expanded it to the point that he might threaten our economy if he screws up and if he has indeed mismanaged that social trust.

No less than drinking too much and sliding behind the wheel. They all knew better. And they gave up their freedom to harm the rest of us. Otherwise why do we have a government at all? Just to keep the Russians away?

You might want to call this totalitarianism and then you can decide for yourself it that would be Facisism or Marxism...but it does not matter much. Modern sovereign states are all Socialist Democratic People's Republics with varying emphasis on one of those words over the others...and as totalitarain as they can afford to be. Literally, if they have the money to hire lots of police and to build lots of prisons then that is exactly what they do.

Turn this economy loose to correct itself and you any your kids better start learning how to read and write Chinese right now...because it can be a trickly little language, they are some clever little people and they are definitely playing this game for keeps. One good mistake at this point and we are as good as beaten.

No one is a Communist anymore. Not really. Not even the Chinese. The Soviets proved that dogmatic Communism can't work. But what those Chinese are doing? Make no mistake about this...they don't believe in the "invisible hand" of anything. They leave nothing to chance. They take control of their society and they manage their economy. No nonsense. The Chinese make things happen. And their brand of capitalism is a winner.

You don't think that's fair? They are not playing this game by our Libertarian rules? Sorry you feel that way.

These guys are committed socialists who never read Marx...
You can't be a competitive Communist if you haven't read Karl Marx and is you haven't actually tried to make socialism work? Our liberals have no idea what they are getting us into. They are as innocent as the proletariat 150 years ago...marching in the streets about the evils of capitalism and demonizing the capitalists.

The Chinese and the Russians understand what to have the central government manage and how much decision-making authority to distribute to the provinces. Because they tried it the "central planning" way 50 years ago. Now it is our turn to make those same mistakes? Not good.

When we conquered the world in 1991 we gave everyone their freedom. But if the Chinese come to power in 2051 then we will be put on our knees. Literally. Sometimes with a soldier standing right behind us. Because that's how they roll. And if we had let the Japaneses win 65 years ago then they would have been much worse than that. But no less today.

This game is for keeps. We better stop acting like no one out there in the world can beat us. Ask those arrogant old heavyweights in Detroit how far that attitude will probably get us.

These guys are committed socialists who never read Marx...
You can't be a competitive Communist if you haven't read Karl Marx and is you haven't actually tried to make socialism work? Our liberals have no idea what they are getting us into. They are as innocent as the proletariat 150 years ago...marching in the streets about the evils of capitalism and demonizing the capitalists.

The Chinese and the Russians understand which parts to have the central government manage themselves and how much decision-making authority to distribute out to the provinces. Because they tried to run things the good old "central planning" way 50 years ago. Now it is our turn to make those same mistakes? Not good.

When the United States conquered the world in 1991 we selflessly guaranteed every nation its freedom. But if the Chinese come to power in 2051 then we will be put on our knees. Literally. Sometimes with a soldier standing right behind us. Because that's how they roll.

If we had let the Japaneses win 65 years ago then those guys and their occupation army of Koreans would have been much worse than the Chinese might be. Nevertheless, this competition is no less urgent today.

The game of global hegemony is played for keeps. Americans better stop acting like no one out there in the world can beat us. Ask those arrogant old heavyweights in Detroit how far such an attitude is likely to get us.

libertarian commie?
Contradictin in terms.

So it sounds like your argument is; we can't beat China as we are, and won't be able to if we 'turn this economy loose', therefore let's have totalitarianism.

There are many justifications for statism, but that one's pretty lame.

You also make the false assumption that if the economy were turned loose, it would be a failure and kids would have to learn chinese. We have always seen that the freer an economy is, the more dynamic and innovative it is; I would prefer to try that, then we'd at least be free, and probably successful too.

The Chinese were doing great 1000 years ago.
They had all sorts of technology and innovations and then the Mandarin bureaucrats took over.

Great idea from ForestBaker; BECAUSE the Chinese MAY shoot us later, we should shoot OURSELVES NOW
..

The truth will not make you free...only reasonably priced...
Colonel, Sir

You said "the freer an economy is, the more dynamic and innovative it is"

The free economy of Somalia is indeed dynamic and innovative. Those guys continue to come up with new and exciting ways to make money. You got to love that free capitalism...the liberty to put a gun in someone's face and simply roll him. So direct. So fresh. No foolishness from the government. Shoot. No government at all.

Nice...
Near No Ad,

I don't know which side of this business you stand on. I said we should not go down the road of Socialism that our government has actually been following all these years and that the current Administration is accelerating us along now...into genuine Communism.

We are moving toward the stupidity of the central government's control of our key industries and our major financial institutions without any clue how to operate a socialist government... because we have been thinking we were free market players...if not actually libertarians...all these many years. Communism can't work. The Sovists proved that. Even the real Communists aren't Marxists anymore. This government is getting us into the practice of socialism as amateurs. We are going to do terrible at that.

But consolidating power at the top is what Supply Side has been about for the past 25 years. When the government let our multinational corporations, our major banks and non-banking financial instutions get too big to fail then they became de facto adjuncts of the government. The politicians are simply foreclosing what they started buying 25 years ago. And that's socialism any way you look at it.

We need to get past this Supply Side capitalism into something that works better. Or we can keep doing what we are now and wait quietly for that knock on the door in the middle of the night.

Let's not do what the executives at General Motors did for the past 35 years. When you see it coming...you get out of the way...if you have any sense (and you stick a knife in it as it runs past). But if you don't deal with something dangerous once you are in there with it...in the thick of it already...then for certain you will be shattered and crushed. That's where we are today and you suggest that we should stand here, do nothing and let nature take its course? That would be really ugly.

reasonably priced
If you threaten a guy with a gun as you said, that is not capitalism. C. means; private property, free markets, rule of law. Those pirates in somalia violate that, and so do all governments that shake you down for taxes.

It's common for statists to point out some criminal activity like pirates or Barney Madoff and say it's a failure of capitalism, or free markets. It doesn't mean it's a valid argument.

"Products are always bought ultimately with products."["
"Say’s Law not only provides a foundation for the "equilibrium in most economic models and a source of the stability of capitalism," as supply-sider George Gilder has noted, but also explains how economic growth occurs.[4] Gilder observed: "As the driving force of economic growth, Say’s law exalts the creativity of suppliers over the wants and needs of demanders or consumers. As entrepreneurs invent new things and learn how to make them more efficiently, unit costs and prices drop and goods become more attractive. As goods become more affordable to a wider public, more people work to acquire them by creating goods to exchange. These new suppliers both provide and acquire new wealth at ever lower expense."[5] That is, supply-work, investment, entrepreneurship, and risk-taking—drives economic growth. "

"Supply-side economics returns the entrepreneur’s role to the center of economic theory. After all, if, as Ture asserts, "changes in output occur only as a result of changes in the amount of production inputs or in the intensity or efficiency of their use," then the entrepreneur must take center stage as he is the agent of innovation and creativity that increases inputs and/or efficiency. "

"This focus on entrepreneurship perhaps best illustrates the difference between supply-side economists and industrial policy economists. A free-market economy leaves most economic decisions to individuals operating in the private sector, rather than government bureaucrats and/or elected officials, as is the case with industrial policy and its more extreme cousin, socialism. While both supply-side and industrial policy economists largely concern themselves with supply-related issues (e.g., investment, production, etc.), the supply-side school of economic thought operates within the wider intellectual framework of free-market economics, knowing that production for the sake of production is fruitless. Production must meet Current or create new demands. Value must be created. And supply-side economists recognize that the government lacks the requisite experience, knowledge, and incentives to make resource allocation decisions or to create value. "

http://www.thefreemanonline.org/featured/a-walk-on-the-supply-side/

I don't know what you 'supply-side', but in free markets, supply-side is what drives economic growth.

How is Somalia free?
Transactions are conducted at the point of a gun, just as the US government does to taxpayers, and banks and anyone who accepts taxpayer's money.

“Competitive Communism” or “Genuine Communism”; whatever the he!! it is, is STILL communism
And THAT means, NO protection for the Rights of EACH individual to his own Life, Liberty and Pursuit of Happiness.

You wrote “These guys are committed socialists who never read Marx. You can't be a competitive Communist if you haven't read Karl Marx and is (sic) you haven't actually tried to make socialism work? (sic?)”.

The implication is clear. IF ONLY the (current US) rulers read Marx and followed it “faithfully”, all will be hunky-dory.

But what’s the essence of Marxism? Answer: FROM each – TO the “common” pot - according to his ability and TO each – FROM the “common” pot - according to his needs.

And who decides what’s each person’s ability and need? Why, the “sovereign” of course. Remember the “sovereign” Forest Baker; the “guy who owns us all”? And that’s what the Chinese do and that’s what you want US do.

I think this is what they teach at business school
Look at how another Wharton grad, Trump, operates. He doesn't support free markets and competition.

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