U.S. Treasury's Capital Purchase Program—Include Insurance and the Auto Industry?

Financial Reform Watch October 31, 2008

Financial Reform Watch is a Blank Rome Government Relations LLC series of alerts developed for our colleagues needing to keep current on Washington's response to the turmoil in the financial markets.

Friday, October 31—AM Report

Based on conversations with sources on Capitol Hill and administration officials, it now seems somewhat less likely the Treasury Department will expand its Capital Purchase Program (CPP) to include the insurance industry. Some life insurers may have publicly overstated their discussions with Treasury, leading to press accounts and misperceptions that the issue had been resolved.

Likewise, sources say Treasury is unlikely to assist the auto industry with funds from the $700 billion financial rescue package unless Congress makes legislative changes.

However, there is one scenario under which two leading auto makers might be able to get some Treasury assistance. GMAC LLC, which is the lending arm of General Motors, is owned 51 percent by Cerberus Capital Management and 49 percent by GM. Cerberus could become a bank holding company in order to qualify for EESA assistance. According to the Wall Street Journal, the federal rules for this would require GM to transfer much of its GMAC holdings to Cerberus so that GM would own less than 24.9 percent of the voting shares and would have no controlling interest in GMAC. Transforming into a bank holding company would enable GMAC to participate in Treasury’s Capital Purchase Program. Additionally, since Cerberus owns 80.1 percent of Chrysler, which is in merger talks with GM, the companies may be able to structure a deal in which Cerberus would exchange Chrysler shares for GMAC shares.

Earlier in the week, auto industry leaders looked into solving their liquidity issues via a $25 billion loan program run by the US Department of Energy (DOE). However, sources are saying that money is targeted for retooling older factories and could not be used for credit purposes. Even if regulators could interpret the law in a way that would allow the funds to be used for the current crisis, DOE has said the money would not be available for 18 months.

Many members of Congress seem receptive to the industry’s argument that the nation’s credit market problems have frozen the critical financing necessary for people to purchase or lease cars and for auto dealers to acquire inventory. It is still an open question whether Congress might take up the cause of the auto industry in an economic stimulus package when it returns in mid-November.

Monday, October 27—6:30 p.m. EDT

Developments surrounding the Treasury's Capital Purchase Program (CPP) in recent days are causing the Department to take a hard look at the justifications for federal investment in industries beyond those federally regulated. Appeals from the insurance and the auto industry are both being reviewed.

It appears the insurance industry proposals are getting the strongest consideration at present, but there are clearly some cross currents at work that are complicating the decision about whether or not to include them in the CPP. Reflecting that duality, Treasury’s Assistant Secretary for Financial Institutions, David Nason, appeared on CNBC’s "Squawk Box" this morning and indicated that there is some difficulty for Treasury to assess the capital needs of an industry that does not fall under federal regulation. He noted that while for the banking industry Treasury is relying on federal regulatory agencies, there is no such federal role in the insurance industry. On the other hand, he noted that it may be important for the stability of the financial sector to expand the CPP to cover insurance. Treasury is evaluating that question as well.

While Treasury grapples with its policy on regulatory issues regarding the insurance industry, the industry itself seems to be divided on the issue of inclusion in the CPP. Life insurance companies are lining up more in favor while property and casualty insurance are expressing opposition.

On the life insurance side, the American Council of Life Insurers (ACLI), representing 353 members, sent an October 15 letter to Treasury Secretary Hank Paulson in which they appeared to recognize that a lack of federal nexus with their industry could be a barrier to assistance. The letter, signed by CEOs of 36 companies, asked the department to create a new "Office of Insurance Information" as "the best means of efficiently gathering publicly available information on our business as you and other policymakers evaluate the appropriate regulatory oversight of U.S. financial institutions." A spokesman for the ACLI told Bloomberg News today that life insurers are talking to Treasury about possible government investments.

On the property and casualty side, Evan Greenberg, the CEO of ACE Group and the Chairman of the American Insurance Association (AIA), issued a statement this afternoon saying most of the association’s 350 members would not seek funds from the CPP. After surveying the Board and a majority of AIA’s membership, Greenberg said, "Those members believe that, as property-casualty insurance writers, they are well-capitalized and well-positioned to weather the current financial market crisis without the assistance of the CPP announced by Treasury. As a result, the property-casualty insurers who are members of AIA strongly prefer to compete in the private market and the substantial majority will elect not to participate in the CPP."

While Treasury is actively considering assisting the insurance industry−and it appears they are leaning towards doing so−the effort by the auto industry to gain assistance does not appear to be gaining as much traction. We anticipate that issue will most likely be addressed by a new Administration in Washington.

To view the Financial Reform Watch alerts from previous weeks:

Notice: The purpose of this newsletter is to review the latest developments which are of interest to clients of Blank Rome. The information contained herein is abridged from legislation, court decisions, and administrative rulings and should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.