Banks, state governors lobby Congress in favor of automaker loans

While critics have derided the approved-but-not-funded $25 billion in loans to automakers, the plan is picking up more support and not just inside the auto industry. The governors of ten states sent a letter in support of the loans to Congress today, and several major Wall Street banks have apparently quietly lobbied Congress to fund the loans as well.

The governors of Michigan, Illinois, Ohio, Tennessee, New Jersey, Delaware, Wisconsin, South Dakota, Kansas, and North Carolina have called on Congress to not only fund the loans, but to also commit $250 million to advanced battery research.

"It is imperative that the federal government make these critical investments in advanced vehicles and battery research to create jobs, reduce greenhouse gas emissions and increase our nation's energy independence," the letter said.

While the governors have made a public call for the funding of the loans, bankers have gone the direct route. According to the Detroit News, powerful banks including Goldman Sachs and JP Morgan Chase, which own a large portion of Detroit's substantial debt, have quietly been lobbying members of Congress in support of the loans. Although Wall Street currently considers their stock to be mostly irrelevant to the market, the banks see the government loans as a sort of insurance policy on their investments. A bankruptcy filing by any of the Detroit Three probably wouldn't lead to the company disappearing entirely, a substantial portion of the company's debt would be wiped out, leading to writedowns by the debt holders, a proposition that the already-battered finance industry can ill afford.

No formal or organized opposition to the loans has established itself on Capitol Hill yet, but the program has been a source of controversy. Some opponents have characterized it as a bail out of the industry, while others see it as pandering to swing states with automobile factories in light of the upcoming elections. Regardless of the outcome, if the loans fail to gain funding, it won't be for a lack of trying.

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New Jersey insurance regulators keeping close eye on AIG situation

New Jersey insurance regulators have been watching the American International Group situation, as one of its subsidiaries is domiciled in the state.

The federal bailout of AIG with a two-year bridge loan of $85 billion could at some point affect the operations of American International Insurance of New Jersey, an auto carrier with 76,000 customers in the state.

If AIG begins to sell assets, an approach that most experts say is likely, then New Jersey Insurance Commissioner Steven M. Goldman would have to approve any sale involving American International Insurance of New Jersey.

If AIG’s subsidiaries were asked to provide funding to shore up the holding company, then the insurance commissioners in whose states those subsidiaries are domiciled would have to approve the move, said Ed Rogan, a spokesman for the New Jersey Department of Banking and Insurance.

The American International Insurance of New Jersey generated about $80.6 million in premium volume in 2007 and is “well capitalized,” Rogan said.

He noted that the agency received “a couple of calls” from people concerned about how the AIG situation would affect their policies.

State and federal officials have said that insurance policies covered by AIG and its subsidiaries are safe because only the holding company is affected in the takeover by the federal government, halting a bankruptcy filing by the global insurance giant.


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A.M. Best Revises Rating Outlook of U.S. Life/Health Companies to Negative

The severe dislocation in the capital markets, fueled most recently by the bankruptcy filing of Lehman Brothers Holdings Inc. and liquidity concerns at high-profile financial institutions, such as American International Group, Inc. (New York, NY), has prompted A.M. Best Co. to revise its rating outlook for the U.S. life insurance industry to negative from stable. This means that, in the near to medium term, A.M. Best expects to take more negative rating actions (e.g. downgrades/outlook revisions) than positive rating actions (e.g. upgrades/outlook revisions) for U.S. life, annuity and health companies. Life and annuity rating unit downgrades outpaced upgrades by an eighteen to six margin while health rating unit upgrades and downgrades were nearly even at six and five, respectively.

Although fundamentals for the vast majority of life/health companies are currently sound, uncertainty continues to be widespread in terms of the future direction of the economy, real estate values, interest rates, equity markets–both domestically and globally–and liquidity. All of these factors have had an impact on life/health insurers’ balance sheet strength and operating performance. A.M. Best believes that access to additional capital is somewhat
limited as stock prices are depressed and the liquidity crunch continues. The repricing of risk has led to large spread widening in the U.S. corporate fixed income market in a “flight to quality,” yet credit remains tight. Concurrently, the new fair value accounting standards have forced companies to take writedowns on illiquid investments, exacerbated by widened corporate credit spreads in addition to securities linked to subprime and Alt-A residential mortgages. Furthermore, credit defaults have begun to increase and many investments have experienced significant impairments and large unrealized losses.

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US auto industry likely to receive $25 billion loan package

The governors of Michigan, Illinois, North Carolina, New Jersey, Tennessee, Ohio, Wisconsin, Delaware, Kansas and South Dakota have expressed their support to the auto industry and have asked the US Congress to back $25 billion in soft loans to the industry before the end of session prior to the presidential elections in November 2008.

Presidential hopefuls, Democratic Illinois senator Barack Obama and Republican Arizona senator John McCain, have both backed federal support to the industry. This is widely seen as a move to remain popular in the important swing states of Michigan and Ohio, both with considerable presence of the auto industry.

The proposed loan package to the industry is being viewed by some as a federal bailout at a time when US lawmakers are debating the bailout of troubled insurance major AIG. Fiscally conservative policymakers are of the opinion that tax dollars should not be used to shore up failing private companies.

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Hard-nosed CEO takes on AIG

As CEO of insurance giant Allstate, Edward Liddy presided with a Midwesterner’s even temper, able to make tough, often unpopular, corporate decisions and stick to them. In particular, Mr. Liddy caught substantial flak for his move to convert Allstate’s sales force to a network of independent agents, and stirred consumer wrath when the insurer stopped writing homeowners policies in coastal towns vulnerable to hurricanes.

That resolve should serve Mr. Liddy well in his newest position atop the hemorrhaging insurance giant American International Group. Mr. Liddy, who retired as chairman of Allstate five months ago, was tapped to replace CEO Robert Willumstad after rating downgrades sparked a liquidity squeeze and near-collapse at the insurer, setting up the Federal Reserve’s $85 billion bailout attempt last week.

Mr. Liddy’s fat Rolodex should also help as he takes on the job of selling off assets of the country’s largest insurer. He’s a member of an elite group of directors that overlap on a number of blue-chip company boards. (In late 2006, Mr. Liddy was number seven on FW’s Mightiest Directors list for his considerable clout in governance circles.) It was on the board of Goldman Sachs that Mr. Liddy got to know then-CEO Henry Paulson, and clearly made a good impression; as Treasury Secretary, Mr. Paulson selected him for his new post. Mr. Liddy also sits on the boards of 3M and Boeing.

AIG could be Mr. Liddy’s biggest challenge yet. While Allstate traditionally was narrowly focused on consumer, auto, homeowners and life insurance, AIG is a conglomerate with far-flung operations, including specialized and exotic products like insurance for corporate directors and identify theft, as well as the derivatives designed to protect investors against losses in subprime mortgages.

“It’s going to be a big job—more complex—than Allstate,” said Peter Newsome, an analyst at Chicago investment firm Sandler O’Neill.

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Present driving age acceptable

For a couple of years now, you've driven your teens to school, dance lessons, church events, football and basketball games, soccer matches and to their friends' houses.

When the teens turn 16 and get their Level 2 driver's license, you're more than happy to end the chauffeuring act and let them drive off on their own.

But studies show that kids who get their licenses at 16 are much more likely to get in a crash and, ultimately, die in one than are those who wait until 17 or 18.

What do you go for, your convenience or keeping your kid out of harm's way?
It only makes sense to pick the latter.

Because the leading cause of death for teens is the car crash, the Arlington, Va.-based Insurance Institute for Highway Safety, an auto insurance industry-funded research agency, is pushing to raise the driving age to 17 or 18.

The institute made its pitch to the annual conference of the Governors Highway Safety Association last week in Scottsdale, Ariz.

Some say it's silly to put licensure on the same time frame as going to college, joining the service and voting. Delaying teen driving, they say, also would make teens less responsible and postpone a traditional rite of passage to quasi-adulthood.

Anyone who got a license at 16 can vouch for the sense of liberation that came with it.

Still, there are those studies. The National Highway Traffic Safety Administration says the rate of crashes for 16-year-olds is 10 times worse than for those between 30 and 59. Those crashes claim the lives of more than 5,000 teens every year.

New Jersey is the only state to have taken the leap to 17, and it has the stats to show the success of that decision. British Columbia and the United Kingdom license at 17.


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State's high insurance rates hurt consumers

In 1973, Michigan adopted a no-fault law, where a claim is filed with one's own insurer instead of suing "the other guy." No fault promised quick service, generous benefits and lower rates. In exchange, you gave up the right to sue, and you were required to have insurance.

But there was a hitch. Rates didn't go down. They went up.

So, in 1978, the Michigan Supreme Court struck down the no-fault law as unconstitutional, ruling the state can't require people to have insurance without some guarantee that rates will be affordable. The Supreme Court ordered the Legislature to develop a definition for affordability that ensures "fair and equitable" rates for consumers. But in a twist, the Legislature defined affordability from the insurance industry's perspective, not the consumer's.

The Legislature's confusing, loophole-riddled definition says rates are affordable if insurers are "reasonably competing" with one another, regardless of whether premiums exceed the consumer's ability to pay.

Since 1989, Michigan's rates have skyrocketed 69 percent -- the fastest rate of increase in the nation. Our $1,000 average premium is approaching New Jersey's $1,100, the country's highest. And Michigan's $436 collision premium is the priciest in the country.

Ironically, Michigan drivers are rated safest in the nation, according to Allstate's 2008 "America's Best Drivers" report. Michigan had 9,000 fewer accidents between 1996 and 2006.


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DCA says auto dealers violate consumer laws

Violations of New Jersey consumer law were found at 49 of 97 motor vehicle dealerships visited in Burlington, Camden, Essex, Mercer, Monmouth and Union counties, according to the state Division of Consumer Affairs.

The division conducted unannounced inspections at the dealerships earlier this year. Those cited either failed to post prices for used vehicles for sale, or failed to post a Used Car Buyers Guide. Prices are required under the state's Consumer Fraud Act, and the buyers' guide is required under the Used Motor Vehicle Trade Regulation Rule and under the Motor Vehicle Advertising Regulations.

Of 2,144 used vehicles inspected, 1,492 had no posted price and 472 did not have a buyers' guide.


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How Guaranty Funds Protect Consumers

With all the turmoil in the financial services sector, consumers might ask what would happen if the company holding their car, homeowners or life insurance policy or annuity fails.

Insurance companies do fail sometimes, but there are safety nets in place to protect individual policyholders.

First, state regulators are charged with guarding companies' financial solvency, and can step in to take over a company that is in danger of failing. When regulators get involved, they can oversee the company's turnaround, including selling it to a financially stronger company. They can also order it into liquidation, or run-off.

If a company enters liquidation, the regulators in charge make sure the policyholders are paid first before any other creditors. If the company does not have enough money to pay all of its claims, regulators turn to the state guaranty funds to make up the difference. Every state has a guaranty fund to cover auto, homeowners and workers' compensation claims and another fund for life and health insurance claims. All insurance companies that do business in the state pay into the funds, so regulators have a pool of money to use when necessary.

Since 1976, about 600 companies that write car, homeowners, workers' compensation and other property/casualty lines have gone insolvent. The guaranty funds have paid about $21 billion to cover claims from those companies. On the property/casualty side, generally, state statute assigns guaranty funds the responsibility of paying claims for insureds residing in their states. The exception to this is workers' compensation coverage. Those claims are handled by the state of residence of the employee (not the employer, who bought the policy). Some states have separate guaranty funds for workers' compensation claims.


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Why AIG matters: No. 1 insurer touches everyone and everything in some way

If you thought the collapse of Lehman Bros. was a big deal, experts say it's peanuts compared with what would have happened if American International Group went under.

AIG's reach is vast. Although it has a small presence in New Jersey, the company is the largest insurer in the world. If it were to fail, experts said, the effects would be felt from Wall Street to Main Street, and all the way to Europe and Asia.

"AIG matters a lot more than Lehman Bros.," said Jeffrey Herrmann, a Saddle Brook lawyer and head of the securities litigation and regulatory enforcement section of the New Jersey state bar association. All the major financial institutions deal with AIG, he said.

"In one way or another, they have AIG backing up some of their risk," he said. "It would be terrible."

After days of tense negotiations, the federal government agreed late last night to loan AIG $85 billion in exchange for a 79.9 percent stake in the company. That might seem like a steep price to pay, but experts say the reach of AIG threatened the stability of the global economy.

Or as New York Gov. David Paterson told CNBC earlier in the day: "It affects jobs, it affects policyholders, it affects drivers. This is a catastrophic problem waiting if we're unable to contain it."


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