Paulson Tells Insurance Companies That There Is No Room At The Inn

November 26, 2008 by Douglas A. McIntyre

600pxuscomptrollerofthecurrencysealSince almost every sector of the economy from autos to cities is asking Henry Paulson for a bit of his $700 billion fund, why should the insurance companies be any different? They are different after a fashion. Paulson has told them “no”.

The insurance industry fancies itself as one of the major buyers of corporate bonds. Its logic for getting capital is that, if it does not, the market for corporate debt will dry up.

Paulson can probably see that the approach has two flaws. The first is that the issuance of corporate debt has crawled to a stop. The interest rates for access to capital are too high. Some deals are being done at “junk” rates, but the companies involved are needy to the point where they cannot do without the money. That makes them less than worthy investments.

The other bit of lost logic is that insurance companies are buyers of corporate debt, but so are pension funds, mutual funds, hedge funds, and funds of all sorts.

What happens if insurance companies begin to fail? The answer is old news. The government will step in to cover policies and citizens will not have to worry that their orphans will be penniless. The government may not be able to save every person or every industry, but the family without income always seems to find a way in.

According to Reuters, "In recent months, life insurers have scaled back the size of investments, trimmed dividends to hold on to cash and girded for further losses and possible rating downgrades, which would trigger higher capital requirements." And, fail they may leaving their customers to be saved by the Age of the Bailout.

Douglas A. McIntyre