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Saturday, October 25, 2008

More Handouts: The Slippery Slope of the Bailout

Word on the "street" has it that soon major insurers like New York Life maybe part of the bailout bill passed last month.


While the rest of Wall Street got clobbered again Friday, a handful of insurance stocks rallied sharply on speculation that the Treasury Department may soon invest in companies in the battered industry.

After being down most of the morning, shares of MetLife (MET, Fortune 500) ended the day up 7%. Hartford Financial Services Group (HIG, Fortune 500) jumped 16% at the end of Friday's session after being down in the morning session. Prudential (PRU, Fortune 500) closed more than 6% higher after starting the day lower.

And Aflac (AFL, Fortune 500), the health and life insurance company that reported Thursday that its earnings had tumbled 76% in the fiscal third quarter, gained 7% by the end of the trading session Friday.


We also have word that automakers may soon be included..


Even as the Treasury began approving capital injections for about 20 regional banks on Friday, including $7.7 billion for a merger between PNC Financial and National City, carmakers pressed for their financing subsidiaries to be eligible for a part of the bailout fund because they provide a major channel of credit to consumers through car and other types of loans


Meanwhile, Barney Frank is demanding, not asking,for more handouts to consumers.



Now, most people were unnerved by Frank's reference to "a lot of rich people that we can tax" in this interview. I was most unnerved by his total disregard for deficit spending.

Such is the slippery slope of this bailout. Now, that we have bailed out and taken a stake in banks, there is virtually nothing that the government can't do for business and consumers. Soon, both the insurers and automakers will also be quasi Socialist. With a massive $700 billion expenditure under their belts, a left wing government in control, the new rounds of spending (and eventually taxing) will be astronomical.

There is of course still a looming credit card debt crisis.

But some banks and credit-card companies may be exacerbating their problems. To boost profits and get ahead of coming regulation, they're hiking interest rates. But that's making it harder for consumers to keep up. That'll only make tomorrow's pain worse. Innovest estimates that credit-card issuers will take a $41 billion hit from rotten debt this year and a $96 billion blow in 2009.

Those losses, in turn, will wend their way through the $365 billion market for securities backed by credit-card debt. As with mortgages, banks bundle groups of so-called credit-card receivables, essentially consumers' outstanding balances, and sell them to big investors such as hedge funds and pension funds. Big issuers offload roughly 70% of their credit-card debt.

But it's getting harder for banks to find buyers for that debt. Interest rates have been rising on credit-card securities, a sign that investor appetite is waning. To help entice buyers, credit-card companies are having to put up more money as collateral, a guarantee in case something goes wrong with the securities. Mortgage lenders, in sharp contrast, typically aren't asked to do this—at least not yet. With consumers so shaky, now isn't a good time to put more skin in the game. "Costs will go up for issuers," warns Dennis Moroney of the consultancy Tower Group.

Sure, the credit-card market is just a fraction of the $11.9 trillion mortgage market. But sometimes the losses can be more painful. That's because most credit-card debt is unsecured, meaning consumers don't have to make down payments when opening up their accounts. If they stop making monthly payments and the account goes bad, there are no underlying assets for credit-card companies to recoup. With mortgages, in contrast, some banks are protected both by down payments and by the ability to recover at least some of the money by selling the property.


Given the size and scope of the mortgage bailout, it's will be near impossible for the economic populists that will soon control the government not to extend their hand to struggling consumers unable to pay their credit card debt.

It won't be much better if John McCain stages a stunning comeback. He is already on record as supporting a near $300 billion bailout of distressed mortgage borrowers. We are headed quickly into a head on collision with Socialism and the most frightening part is that it appears both the folks in D.C. and the folks that will put them there want it.

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