Will Congress Buy Into More Bailouts for Insurers?

(MoneyWatch)  It's official. Well, semi-official, anyway. Ailing life insurers are in line for a big chunk of the $130 billion in TARP funds, according to a story leaked by U.S. Treasury officials to the Wall Street Journal. And Treasury may be trying to soften the blow by leaking it rather than stating it.

Life insurers like Lincoln National and Hartford have been buying up savings and loans since last year with the expectation that they could get some of this money. But will Congress get in line? Our esteemed representatives have been hammered by the public because of the $170 billion given to American International Group (AIG) and the way much of that money wound its way to investment banks like Goldman Sachs, not to mention undeserving AIG executives who helped run the company into the ground.

Is Congress now ready to give money to insurance executives whose failures last year were rewarded with multimillion dollar paychecks? Prudential's CEO alone made $14 million.

There's a case to be made for both sides. One can argue that life insurers have dug themselves into a deep hole because their stock portfolios have taken as much as a 40 percent hit. True, that's the same beating as Joe Sixpack's 401k, but Joe won't get repeated downgrades from credit rating agencies. And it was those downgrades, coming at the worst possible time, which caused AIG to self-destruct.

So the life insurers will argue that it's not their fault and if they don't get help, we could start seeing serious defaults in companies that are (here we go again) too big to fail.

The counterargument is that this situation looks a little too much like AIG redux. Just like AIG the life insurers have bought up thrifts and seem to be claiming that they are not insurers anymore, but banks. The freedom to escape insurance regulation is exactly what got AIG into trouble.

Even though most life insurers didn't dabble in credit default swaps as AIG did, they've been selling variable annuities, which guaranteed returns that are now unrealistic. Guaranteeing returns on a stock market portfolio in a down market is as dangerous as any other form of gambling, unless the seller is properly hedged.

Unfortunately we may not know that until the lifers report first quarter earnings later this month. And by then, they may have already gotten their piece of the TARP.