Step One to Getting Bailout Money: Become a Bank

Genworth Finanancial Inc., Hartford Financial Services Group, Inc. and American Express have all joined the parade of non-banks seeking financial institution status, moves that will enable them to request funds under the government’s bailout program and get access to low-cost funds in the form of deposits.

Genworth Financial, the multi-line insurer based in Richmond, Va., filed a savings and loan holding company application with the Office of Thrift Supervision late Friday while also filing an application for the U.S. Treasury Department’s Capital Purchase Program (CPP) under the Troubled Asset Relief Program (TARP).

The move mirrors that of The Hartford, which filed a similar application earlier in the day.

“We are taking these actions as a strong and well-capitalized financial institution looking for maximum flexibility and stability,” said Ramani Ayer, The Hartford’s chairman and chief executive officer, upon announcing the application Friday. “Securing capital at the terms available through the Capital Purchase Program could be a prudent course in this market environment and would allow us to further supplement our existing capital resources.”

The Hartford estimates that it would be eligible for a capital purchase of between $1.1 billion and $3.4 billion under existing Treasury guidelines. The final amount of capital request will be determined following approval by Treasury.

American Express took a slightly different tack last week, receiving approval from the Federal Reserve to become a bank holding company, similar to the financial structure of a commercial bank. (“American Express Granted Bank Holding Company Status,” Nov. 1)

Published reports have American Express seeking $3.5 billion in TARP funds.

“The situation for the insurance companies is very different from what it is for American Express,” Gwenn Bezard, research director for Aite Group, told insideARM. “The insurance companies make investments, and with the stock market dropping, they want to make sure that they have the funds to meet their obligations (insurance claims). This gives them access to deposits and to government (TARP) money if they need it.”

The insurers are not in the lending business, so don’t have the problem of troubled receivables and increasing chargeoffs like American Express and other credit card issuers, Bezard adds.

American Express increased its loan loss reserves to $2.6 billion for the third quarter of the year, up from $1.7 billion in the year earlier period. Other major card issuers have had similar steep rises in loan loss reserves.

By becoming a bank holding company, American Express can use some of the government funds to help offset bad debts, according to Bezard.

If the money will be used in a way that increases consumer lending, then it’s the right move, according to Dimitri Michaud, consumer finance analyst with ARM advisory firm Kaulkin Ginsberg. “Obviously the insurers aren’t going to lend to people, but if credit issuers can make some of the TARP money available to borrowers, then it can only help the economic situation,” he said.

Meanwhile, the weekend meeting of leaders of the world’s 20 largest economies resulted in no definitive action, only statements regarding more financial oversight, and promises to keep trying to stabilize the financial system.

Automakers and some large cities are also seeking relief under TARP, though the Treasury Department’s deadline for applications for CPP funds was at the end of the business day on Friday.

Bezard said it is difficult to predict how the government will handle requests for funds from non-financial entities, though so far there have been no TARP funds awarded to such enterprises.