How To Avoid a Botched Insurance Bailout

5 key lessons from the bank and automaker rescues

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Bailouts are obviously a growth industry. So if the government’s getting into this line of work for the long haul, let’s hope they start to get it right.

The insurance industry represents the next opportunity to refine the Treasury Dept.’s ever-evolving bailout formula. The Wall Street Journal and others report that Treasury is considering capital infusions in sinking insurers such as Prudential Financial, Hartford Financial, Genworth, Lincoln National, and possibly even the giant MetLife. These bailouts supposedly will be much smaller than the $45 billion the government has given Citigroup and Bank of America – or the $180 billion that has gone into the black hole known as AIG. But if a few accept money, other palms will probably extend, and a couple billion dollars here or there could suddenly add up, as they say.

[See more companies that could fail this year.]

Maybe it’s in the nation’s interest to bail out the insurance industry. I can’t say for sure. What I do know is if the government conducts an insurance bailout the same way it has handled the bank bailout, taxpayers should revolt. Here’s how the government can fix past mistakes and conduct a better bailout:

Require the CEOs to explain why they need the money. I mean in public, not just in confidential meetings with a few honchos at Treasury and the Federal Reserve. CEOs of insurance companies seeking federal money should be required to testify before Congress, and not do so months later like the seven banking suits who spoke before Congress in February. They need to explain themselves before they get the money – just like the auto-company CEOs had to do last November and December. Getting an earful from grandstanding politicians about greed and angry constituents back home – whether relevant or not – will be a good primer for what the CEOs might have to endure as wards of the state. If they’re feeling really confident, the CEOs can even fly to Washington in private jets.

[See why the government’s treatment of GM is a model for other bailouts.]

Insist on a plan – that we all can see. General Motors and Chrysler had to submit public “viability plans” to the government before getting any federal money, to show why they needed it and what they’d do with it. When the two companies said they needed more money, they had to submit new, updated plans – which the government basically rejected. That’s a great precedent for insurance companies, who can look at the GM and Chrysler plans for a full set of dos and don’ts to follow when asking for taxpayer money.

The insurance industry is different, you say? It’s more complex and arcane than companies that build cars? The insurance companies are in a predicament that’s too complicated for ordinary taxpayers to understand? Okay then. But if it’s too complicated to understand, then it’s too complicated to invest money in. That’s one of the basic lessons of the whole financial meltdown. Bailout seekers should have to live by that too.

[See how secrecy could wreck Geithner’s bank-rescue plan.]

Set clear rules before giving away any money. We’ve all learned this one, right? The uproar over multimillion-dollar bonuses at AIG and Merrill Lynch has proven that bonuses, perks, and exorbitant pay are an explosive issue that could bring down the whole bailout regime. Duh. But let’s make sure. The Treasury’s famous “term sheets” laying out each company’s bailout rules should spell out pay rules in language we can all understand.

[See 5 lessons from the AIG and Merrill bonuses.]

Explain who else will benefit from an insurance bailout. The AIG bonus scandal was obviously unsettling. But much more important were revelations that AIG trading partners like Barclay’s, Deutsche Bank, and Goldman Sachs basically got refunds on their deals with AIG – at 100 cents on the dollar. Nobody from AIG or the government has adequately explained why everybody else should bear some degree of loss for the financial meltdown, yet taxpayers should fully redeem the world’s most sophisticated investors for unwise decisions. Of all the government’s missteps, this could end up being the biggest scandal of all. So let’s not compound it by allowing insurance companies to do the same thing. Instead, they should fully disclose any stealth bailouts that could occur if federal money gets passed on to others – or pledge that there won’t be any.

[See 7 surprises buried beneath the AIG bonuses.]

Tell us when this will end. AIG’s original plan was to quickly sell off assets to pay back government loans. But that plan has now morphed into something more open-ended that will take years to play out. G.M. and Chrysler each had to provide a timeline for returning to profitability. The government found their estimates unrealistic, and told them to do better or try their luck in bankruptcy court. If we’re now going to spend billions to stabilize insurance companies, the recipients should be required to give a plausible estimate of when they’ll be able to pay the money back. Just asking.

TAGS:
AIG, Inc.
Citigroup
General Motors
Chrysler
Bank of America
  • Rick Newman

    Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success and the co-author of two other books. Follow him on Twitter or e-mail him at rnewman@usnews.com.

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