Commercial Insurers Seeking Bailout Money Buying Banks and Savings and Loans
Pssst...want to be a part of the financial bailout?
Have I got a deal for you. I know this little savings and loan in the middle of Florida. For every dollar you put up buying it, you get back 100 to 300 times your investment back in cash.
Huh? Does that make sense to you? Well, it does in the post-bailout world. Insurers are state regulated for the most part. Banks and savings and loans are federally regulated. Insurers that own savings and loans or become holding companies for thrifts, S&Ls, and banks are regulated at the federal level. Why is that important? Because, once the insurer owns such an asset, the insurer can participate in the $250 billion available from the U.S. Treasury to shore up the financial markets.
The program is called the Capital Purchase Program. The U.S. Treasury is going to purchase $250 billion of senior preferred shares in the bank or thrift. For those of us who are a bit cynical, we have to wonder whether the insurers read the fine print about executive compensation:
"Companies participating in the program must adopt the Treasury Department's standards for executive compensation and corporate governance, for the period during which Treasury holds equity issued under this program. These standards generally apply to the chief executive officer, chief financial officer, plus the next three most highly compensated executive officers."
The Hartford is one of the insurers participating. Once, long ago (okay, last May), The Hartford traded for over $100 per share. Today, its stock floats around $10 per share. The Hartford will purchase "Federal Trust Bank for approximately $10 million." This purchase will make The Hartford eligible for $1 to $3.5 billion in Treasury money.
Federal Trust Bank is described as operating "11 full-service offices in Seminole, Orange, Volusia, Lake and Flagler Counties, Florida. The company's executive and administrative offices are located in Sanford, in Seminole County, Florida." Three other insurers reportedly met the Friday deadline for participation in the program as well buying savings and loans in Maryland, Minnesota and Indiana. Other insurers outright oppose insurer participation in the program. Chubb Vice Chairman John Degnan wrote Treasury Secretary Paulson on October 29, 2008, opposing property and casualty insurer participation in the program.
Comments
I’m wondering why this looks like such an attractive move to the insurers; wouldn’t the insurer, through whatever wing it buys the bank, then be on the hook for any toxic assets? Are they hoping that the bailout money exceeds the value of those assets? Do they think the bank is in a better position than most and doesn’t have a bum book? I wonder how much of those funds they can channel to their insurance divisions.
Regardless, I guess a 300% return on investment looks pretty good. Especially if one can sell the banking portion in a few years.
Very interesting post. As Bruce saya - a 300% return on investment is a very nice prospect. But some of these toxic instruments could prove very costly in the short term.