Yesterday evening we mentioned the rally big insurers like Hartford (HIG) and Prudential (PRU).
Then just a few hours later, news reports confirmed that the insurance companies would be eligible for TARP. It was basically known that the Treasury would accept them, but the timing of the announcement was a mystery.
Given that our government’s been leaking like sieve lately (see: the stress-test runup), it’s impossible to believe that the news hadn’t been leaking during the day.
As Bob Pisani just astutely pointed out: the fact that Treasury is admitting insurance companies to TARP is an acknowledgment that their failure would pose systemic risk.
Somehow we kind of divined that earlier.
David Goldman offers the following insight:
First the Obama administration pulls the rug out from under the insurance industry by playing politics with credit seniority in the Chrysler bankruptcy, adding to the uncertainty of valuing trillions of dollars of corporate and commercial real estate debt. It then offers a bailout to the investors.
It’s not just Chrysler, of course: it’s the fact of loan modification that skims money for the servicers and starves the subprime pools, it’s the threat of cramdown in mortgages, it’s an administration that is applying banana republic finance techniques. There is a reason that subprime home equity AAA’s are trading at 27 cents on the dollar — that’s what you would get if you have 100% defaults and a 27% recovery rate. It’s practically impossible for things to get that bad, so there must be another explanation. And there is: the threat of government programs pushing recovery into the distant future and diverting cash flows away from bondholders makes this asset class extremely uncertain.
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