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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