Another Insurance Bailout

Last fall, the lobbyists for the insurance industry were swarming across Capitol Hill warning of dire consequences if Congress failed to enact federal assistance and guarantees to protect insurance companies from future losses from terrorist attacks.

In a transparent effort to stampede the legislators, the companies’ warned that credit for new construction would dry up unless there was taxpayer-backed reinsurance in place by the end of 2001.

The insurance lobbyists had hoped that Congress would respond to the fear tactics as they did so quickly in providing a $15 billion bailout for the airline industry within weeks of the September 11 attacks on the World Trade Center and the Pentagon. On second look, the need for the giveaway to the airlines seemed a lot less urgent and lot more wasteful of taxpayers’ money than the airline lobbyists had told Congress.

By the time the bailout for the insurance industry was being peddled on Capitol Hill, Members of Congress were beginning to get complaints from back home and from consumer organizations about the unseemly rush to open up the Treasury vaults to the airlines. As a result, the pleas from the insurance industry faced a slightly more skeptical Congress which began to raise questions about the need for still another taxpayer subsidy.

The insurance bailout was still sitting there as unfinished business when the Congress closed up shop and went home in late December. The issue will undoubtedly be revisited when Congress comes back in a few days, but now new information is beginning to surface which casts even more doubt on the tales of woe spun by the insurance lobbyists.

Surveys conducted by The American Banker, a daily newspaper published for the financial industry, reveals that few loans for construction projects are being rejected or called because of the lack of taxpayer-supported terror insurance.

“The banking industry is not going to immediately think every project is terror-prone and call-in loans or stop making new ones,” the American Banker quoted Maurice Hartigan, President of the RMA financial risk management association.

That is in contrast to the scare stories of last fall. Then Maurice Greenberg, Chairman of the insurance giant AIG was quoted as warning: “On January 1, you’re going to see contractors and banks saying that all the loans they made may have had their covenants breached by not having full insurance.”

But, John Mastromarino, executive vice president for risk at Fleet Bank in Boston, scoffed at the idea that loans would be called:. And another banker quoted in the Banker asked “why would a bank want to be stuck with a half-finished building by calling in a loan?”.

There was also talk that federal bank regulators would put out guidance about curtailing credit because of insurance problems. But, the Banker found no indication that the regulators had plans for such action.

Despite the lack of concern by bankers and regulators, the insurance industry isn’t likely to give up using the September 11 attacks as a rationale for taxpayer subsidies. The lobbyists will be perched on the doorsteps of House and Senate as soon as Congress reconvenes.

But, if Congress does vote any aid, it may be in a more reasoned form than the outright giveaway ala the airline bailout package. And now that the insurance bailout train has been slowed, there may be time to convince to Congress to include some safeguards that would help end the long-time problems of insurance redlining.

Inner-city neighborhoods still suffer from the lack of insurance at reasonable cost. Community groups, like ACORN and the Center for Community Change, pled with sponsors of the bailout legislation to at least include provisions that would require insurance companies to report where they make investments and write policies by census tract. This would give inner city residents information with which to challenge the companies which turn their backs on entire neighborhoods in providing insurance.

Banks are required to report where they make loans under the Home Mortgage Disclosure Act (HMDA). And this data has proven to be tremendously valuable in halting discriminatory lending practices. Surely, the insurance companies can agree to provide the same kind of data on their operations, particularly if they are going to have their hands out for taxpayer bailouts.

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