Friday, April 10, 2009

Bailout Line Gets Longer

The endless bailout line gets longer -- and why we're going about this the wrong way

The seemingly endless line of companies looking for taxpayer-funded bailouts just keeps getting longer, and the folks in Washington show no sign of forcing anyone out of it. This morning, we've learned that life insurance firms will receive aid from the TARP.

From the Wall Street Journal:

"The Treasury Department has decided to extend bailout funds to a number of struggling life-insurance companies, helping an industry that is a lynch pin of the U.S. financial system, people familiar with the matter said.

"The department is expected to announce the expansion of the Troubled Asset Relief Program to aid the ailing industry within the next several days, these people said.

"The news will come as a relief to a number of iconic American companies that have suffered big losses made worse by generous promises to buyers of some investment products. Shares of life insurers have fallen more than 40% this year. Their troubles led to a string of rating-agency downgrades that, in a vicious cycle, made it more difficult for some insurers to raise funds.

"The life-insurance industry is an important piece of the U.S. financial system. Millions of Americans have entrusted their families' financial safety to these companies, so keeping them on solid footing is crucial to maintaining confidence. If massive numbers of customers sought to redeem their policies, it could cause a cash crunch for some companies. And because insurers invest the premiums they receive from customers into bonds, real estate and other investments, they are major holders of securities. If they needed to sell off holdings to raise cash, it could cause markets to tumble.

"The decision by the Treasury Department adds a third industry to the banks and auto companies that have already received bailouts from the government. While American International Group Inc. is a major insurer and is the biggest recipient of government money, its problems weren't caused by its life-insurance operations, but derivative bets that went bad."

You know what my biggest problem with all these bailouts is? No one seems to be denied! Money is given to almost anyone and everyone. What we SHOULD be doing is what nurses and doctors do in the ER -- triage. Figure out which institutions are too weak to survive and euthanize them. Deny them bailout money. Let them fail. Then let their stronger competitors pick over their carcasses. Bolster those stronger companies with aid if need be.

Washington isn't doing that, though. Take the banking industry "stress test." Policymakers have already said that if any institution fails the test, they'll get time to raise money or will be injected with government capital. Huh? What's the sense in that? Why aren't we weeding out the weak, allowing them to fail and parcelling up their businesses to their stronger, surviving brethren?

It's like having two people showing up to get their driver's license -- one of whom gets a 100% on the computer-based test and passes the driving portion with flying colors ... and another who shows up drunk, crashes into the curb twice, and spends the rest of the time hitting on his instructor. Should both people really be given a license? Wouldn't it make more sense to pass the good guy and fail the other -- or send him off to jail? I just don't get this attitude where every institution is above average (or treated that way). By the way,(cue:shameless promo music) the line to get a jumbo mortgage is long but folks are locking in low 5% on 5Y and 7Y ARMS and mid 5% 30Y Fixed jumbo mortgage rates. Have a great weekend.