WASHINGTON - As the global financial crisis deepened on yet another frantic Friday, the Treasury Department moved to dramatically expand its rescue efforts to take ownership stakes in the nation's insurance firms.
While the Dow closed down more than 300 points, shares of giant insurers rose on word that the Treasury will expand its planned cash injections for banks to include insurers, on the ground that, like big banks, they're too important to fail.
The Treasury's insurance plan signals new concerns about a sector of the economy whose troubles until now have been overshadowed by the banking industry, though the U.S. stepped in five weeks ago to bail out giant insurer AIG.
Other insurers, including the Hartford, Prudential and MetLife, have pushed the Bush administration to include them in the plan. Many companies have taken losses from mortgage-related securities and other investments and are struggling to replenish their coffers.
Government officials worry that the collapse of a major insurer could further destabilize the financial system because of the crucial role the companies play in backstopping a wide range of financial transactions, although the direct impact on holders of car, life and other insurance policies would be modest, industry officials said.
The new initiative underscores the growing range of problems that Treasury is scrambling to address with the $700-billion allocated by Congress this month. The shape of the plan has changed repeatedly since Treasury Secretary Henry Paulson introduced it last month as an effort to rescue banks by buying their troubled mortgage-related assets.
That original mandate has now been pushed aside by a plan to take equity stakes in banks and insurance companies, and other businesses are lobbying to be included.
The government has been forced to expand the plan partly because the federal guarantees previously given some institutions, such as banks, have put other companies and financial sectors at a disadvantage, making them less attractive to uneasy investors.
The move to rescue other insurers raises questions about how much the government will need to spend to prop up the insurance sector and which part of the nation's financial system might need help next.
The government's power to choose winners and losers in the crisis was illustrated Friday when the Cleveland-based bank National City was forced to sell itself when regulators turned down its request for a Treasury investment after deciding the bank was too weak to save, people familiar with the matter told the Washington Post.
Instead, the Treasury gave $7.7-billion to PNC Financial Services Group to help buy National City. It did not require that the money be used for new lending, the stated purpose of the government plan.
Treasury officials backed away Friday from plans to publicize a new round of investments in about 20 large regional banks over concerns that those not on the list would be perceived as unhealthy and punished by investors.
AIG's continuing saga shows rescue risks
The cost of saving the country's largest insurer continues to rise, and its continuing troubles highlight the difficulty of rescuing insurance companies after they begin to unravel.
Senior managers at American International Group warned the Federal Reserve Friday that the company would likely need more taxpayer money than the $123-billion in rescue loans the government has provided, two sources familiar with the private talks told the Washington Post.
AIG is having a painful time trying to pay off bad bets it made guaranteeing other companies' risky mortgage investments, which have lost much of their value.
Five weeks after the government launched an unprecedented bailout to save the private company from bankruptcy, AIG has so far burned through $90.3-billion of government credit.
Each week, AIG has faced multimillion-dollar collateral calls to pay off the mortgages and other assets it guaranteed, sources said. The calls were triggered largely because AIG's credit rating was sharply downgraded.