Uncle Sam to the VA rescue

For most of us, the best alternative to a prescription sleep inducer is a discussion about insurance. Unless you’re an actuary, or one of the many clever investors like Warren Buffett who have made fortunes in this opaque and arcane business, insurance is Snooze City. But recent events have thrust the insurance business into the spotlight. And what we’ve seen has been unnerving. In the center ring, of course, is American International Group Inc., the New York-based insurance behemoth. First, there was Eliot Spitzer’s war against the firm, which resulted in the downfall of Maurice R. “Hank” Greenberg, the company’s legendary chairman. (The combative former New York Attorney General then became governor and got caught in a kind of naked short squeeze, but that’s another story.) Then, there were the federal bailouts of AIG, the question of why some of the bailout money went to The Goldman Sachs Group Inc. and other Wall Street giants, the huge flap over the company’s bonuses and the big Washington show trial of AIG executives. Whew! No wonder “The Guiding Light” is going off the air — how could any soap opera compete with the “As AIG Turns?” But the company is something of a unique case, because its derivatives and trading businesses constituted the equivalent of a large trading/banking firm within the insurer. The current troubles at other insurers are different. As Darla Mercado, InvestmentNews’ insurance reporter, has been informing readers over the past several months, many conventional insurers have been wounded by the plummeting value of their assets — largely securities and real estate — and the high cost of the promises they made to investors in the variable annuity policies they sold. Isn’t it ironic? For years, many advisers and consumer advocates argued that variable annuities were rotten investments because the insurance companies charged too much. Now, advisers who recommended (and the “misguided” investors who bought) VA policies that locked in the old, higher prices of stocks look like geniuses. But they’re worried the insurance companies guaranteeing the contracts might not be able to pay. Enter the federal government. According to The Wall Street Journal, the Department of the Treasury is about to extend funds from the Troubled Asset Relief Program to insurers that own federally chartered banks. How much will be available and how the insurance companies will use the money have yet to be determined, but of all the federal rescue efforts, this one may make the most sense. While restoring confidence in the banking system and fixing Detroit probably would best be accomplished through the bankruptcy courts, shoring up insurance companies through short-term loans seems like a least-worst kind of idea. For one, both the insurance business and the federal government are long-horizon enterprises. The insurance companies currently face a mismatch of assets and liabilities. If the feds can ease them over the short-term hump as a lender of last resort, they (or we, as taxpayers) are likely to get paid back in full, and even make some money in the process. Should the federal government be in that kind of lending business? Probably not. But of all the stupid things the government has done, making short-term loans to insurance companies, on which millions of American depend, may be one of the least stupid things it can do.