WASHINGTON--An Aon Corp. official urged the Treasury Department today to make greater use of the insurance component of the Troubled Asset Relief Program as a means of opening up the currently frozen U.S. credit markets.
"Such an approach would benefit taxpayers, financial institutions saddled with illiquid assets, and homeowners," said D. Cameron Findlay, executive vice president and general counsel of Aon, which is based in Chicago.
Mr. Findlay made his comments in testimony at an oversight hearing on the Emergency Economic Stabilization Act of 2008 held by the House Financial Services Committee. He was testifying on behalf of the Council of Insurance Agents and Brokers.
The insurance program to back up distressed mortgage-based securities was added to the EESA as the price for House Republicans to support the legislation. The Treasury Department is drafting regulations that will be used in connection with the program, but has not implemented the program as yet.
Asked if he had examined the Aon proposal, Secretary of Treasury Henry Paulson said in answer to a question that he "hasn't looked" at the Aon plan, but that his staff might have examined it.
But, he confirmed in answering a question posed by Rep. Judy Biggert, R-Ill., that the Treasury Department is developing regulations designed to implement the insurance plan.
"We will develop a plan," Mr. Paulson said. "The legislation asked us to develop a plan and we will develop a plan."
Pressed further, however, he declined to offer specifics, saying he would not "speculate about what is likely to be implemented in the future." He also responded to a similar question from Rep. Carolyn Maloney, D-N.Y., by saying he could not tell when the plan will be completed.
In his testimony, Mr. Findlay proposed that the insurance program be based on the Price-Anderson Nuclear Indemnity Act, and would use a combination of risk retention, risk pooling and government backstop liquidity.
"Insurance plays a fundamental role in the operation of the world's financial markets," Mr. Findlay said.
"Any coordinated effort to combat the turbulence roiling those markets should consider the potential for an insurance component," he said.
He explained that as long as the problems created by depressed valuation of these assets in the capital markets remain, "no matter the volume of capital infusions, financial institutions will have a difficult time playing their critical role in the functioning of our economy."
Mr. Findlay said that an insurance program would have significantly lesser short-term cash requirements than capital infusions, and because such an insurance plan would be largely funded by its direct beneficiaries, it would restore liquidity without requiring massive outlays of government funds to the benefit of taxpayers.
"The insurance of illiquid assets would also protect financial institutions and the economy," he said because an insurance program would provide asset holders the option to hold assets until maturity or until economic conditions permit the restoration of the assets' value.
As a result, he said, it would not flood the market with distressed assets, which could have the effect of further depressing asset values.
"An insurance program would also prevent opportunistic purchases of depressed assets by predatory investors," Mr. Findlay contended. "Furthermore, the plan provides a framework for managing risks from the securitization of assets to helping the financial services sector avoid similar crisis in the future," he said.
"That is why the CIAB and its members believe that the Department of Treasury should vigorously exercise the authority granted to it in Section 102 of the Emergency Economic Stabilization Act, and establish a program to insure the value of troubled and illiquid financial instruments," he explained.
As Aon conceptualizes it, such a plan would be largely self-funding. It would involve the sharing of risk by participants in an entity that Aon calls an "asset stabilization pool."
Participants in the asset stabilization pool would have a portion of the principal and interest from specific, illiquid assets guaranteed.
The Aon program would insulate an asset holder from the decline in value resulting from the non-payment, or expected non-payment, of principal and interest.
Asset holders would be required to retain a small percentage of the shortfall of principle and interest, subject to a maximum annual payout per asset. Asset holders would be reimbursed from the pool for a shortfall in principal or interest once such amounts exceed their retention in a single year.
To receive the benefit of such coverage, participating institutions would have to pay premiums into the pool. Each year, actuaries would calculate the level of premium needed to fund guarantee payments for the following year. Premium payments to the pool would be capped by the government.
In the event that payments from the pool exceeded premium collections, the government would lend the pool the funds needed to make good on the guarantees, Mr. Findlay said.
The government would be reimbursed by premium collections in following years. The Treasury Department could calibrate liquidity by speeding up or slowing down the collection of premiums.
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