The global financial crisis deepened on yet another frantic Friday as the Treasury Department weighed expanding its rescue efforts to include insurance firms.
While the Dow industrials closed down more than 300 points, shares of giant insurers rose Friday on word that the Treasury may expand its planned cash injections for banks to include life insurers, on the grounds that, like big banks, they're too important to fail.
“This is in line with Treasury's plan to increase confidence in the nation's financial institutions,” said former Oklahoma Gov. Frank Keating, the chief executive of the American Council of Life Insurers. “Life insurers want to make sure consumers don't delay acting on their financial and retirement security needs out of concerns prompted by current economic conditions.”
Treasury officials didn't disclose how or where the department might inject capital into insurers, and the details are important because Treasury Secretary Henry Paulson repeatedly has noted that insurance needs to be federally regulated. State insurance commissioners now regulate the industry.
The Treasury isn't likely to assist property and casualty insurers that underwrite policies on homes and automobiles. Instead, it would focus on life insurers that offer annuities and other bank-like financial products.
An industry official, who spoke on the condition that his name not be used given the unfolding nature of the development, said that insurers such as Hartford Financial and Prudential Financial are the most likely to receive cash injections to shore up confidence in their solvency.
The Treasury announced earlier this month that it would inject $250 billion into banks, directing $125 billion to the nine largest national banks and allowing other banks until Nov. 14 to seek capital injections from Treasury to shore up their balance sheets.
The auto industry also has stepped up efforts to secure a share of the money, The New York Times reported. Carmakers pressed for their financing subsidiaries to be eligible for a part of the bailout fund because they provide a major channel of credit to consumers through car and other types of loans. On Friday, a top economic adviser to Sen. Barack Obama of Illinois, the Democratic presidential nominee, said Obama supported the auto industry's request to be included in the bailout package.
Insurance industry officials confirmed that the industry approached the Treasury about the injections as a way to restore confidence amid signs that Americans were staying away from financial products of all sorts.
The Federal Reserve in September took over American International Group, one of the world's largest insurers, taking a stake in the company in exchange for an $85 billion loan that later was increased.
“There is a lot of nervousness after AIG went under. A lot of people have their retirement money in these things and they want to make sure they're safe,” said David Wyss, the chief economist for Standard & Poor's.
Insurance also got attention from another regulator Friday. The Federal Deposit Insurance Corp. sought comment on a plan to begin providing deposit insurance of up to $250,000 for accounts involving loan servicers who collect mortgage payments on behalf of the complex mortgage bonds held by investors globally. These bonds, called mortgage-backed securities, are at the heart of the U.S. financial crisis. The FDIC action aims to reduce uncertainty about the troubled financial products.
Separately, The Washington Post reported that the Treasury Department was planning to announce that as many as 22 regional banks – including Capital One, SunTrust Bank and PNC – have accepted billions in capital injections from the government that are designed to spur lending and to drive consolidation in the banking industry.
Other banks receiving government money include Regions Bancorp, KeyBank of Cleveland and possibly BB&T, sources told the newspaper. PNC announced Friday morning that it would use the Treasury funds to help it buy struggling Midwest bank National City.
The developments in the insurance industry came late on a frantic day that saw trading in stock futures halted before the opening bell had been rung on Wall Street. Stock futures, instruments designed to measure where the market might go after opening, were so volatile that they triggered the so-called circuit breakers that halt trading temporarily.
The global contraction is likely to compound the U.S. economy's problems.
Exports, a rare bright spot for the U.S. economy for much of this year, will surely fall as foreign countries see their currencies slump against the dollar and economies shrink.
The IMF announced Friday that it had reached a tentative deal for $2 billion in emergency lending to Iceland, and it's in talks with several other nations. The international lender, on the sidelines for much of this decade during the global boom, is now negotiating loan packages with Hungary, Pakistan and Ukraine.
President Bush will host a summit of the world's 20 most developed economies on Nov. 15 to search for measures to ease the global financial crisis. In preparation, the White House announced Friday that Bush had designated three administration officials – Daniel Price, a presidential adviser on international economic matters; Reuben Jeffery, undersecretary of state for economic affairs; and David McCormick, Treasury undersecretary for international affairs – to help organize the meeting.
They will help define the summit's agenda, incorporate ideas from participating foreign governments and work to build consensus.