NU Online News Service, Dec. 8, 3:46 p.m. EST
WASHINGTON–Financial firms could be forced to bail out Florida’s troubled property insurer of last resort under an amendment proposed for House financial services reform legislation, according to one analysis,
The measure must be cleared by the House Rules Committee. Proposed by Rep. Kathy Castor, D-Fla., it “would specify that state catastrophe insurance programs are covered financial companies with respect to enhanced dissolution authority.”
Requests for comment from Ms. Castor, who represents the Tampa areas, drew no immediate response.
Eli Lehrer, a senior fellow at the conservative Heartland Institute think tank in Washington, said adding the amendment to House financial services legislation would mean that large financial firms would be forced to bail out Florida’s troubled Citizen’s Property Insurance Corporation.
According to a study by the Insurance Information Institute earlier this year, Citizen’s is among a number of state-run property insurers of last resort “on shaky ground” financially.
According to the I.I.I. report, Citizens accounts for 69 percent of all state residual market FAIR Plans’ exposure to loss, and saw its exposure more than double from $210.6 billion in 2005 to $485.1 billion in 2007, “reflecting rising coastal property values and higher building and reconstruction costs.”
Florida Citizens’ exposure to loss declined somewhat to $421.9 billion in 2008, and by June 30, 2009, around $400 billion, I.I.I. noted.
“The amendment is only six words but would have sweeping, negative consequences for the nation and the federal budget,” Mr. Lehrer said.
He said it would benefit only Florida and nowhere else, “because no other state clearly qualifies–although California may.”
The Florida program, said Mr. Lehrer, is already insolvent based on private sector accounting standards, meaning federal taxpayers (and banks under the proposed regime) could potentially be on the hook for the entire $20 billion or so in Citizen’s unfunded liability.
It would be added to H.R. 4173, the Wall Street Reform and Consumer Protection Act of 2009. The Rules Committee is today considering what amendments it will clear for floor consideration.
Debate on the huge bill will begin tomorrow, with the House Democratic leadership planning to have a final vote by Friday.
Amongst its other provisions, the bill would allow federal banking regulators to take over systemically risky financial institutions and liquidate them.
Another provision of the bill sets up a systemic risk resolution fund that would be funded by assessments by financial institutions with assets of $50 billion or more.
Creation of the systemic risk resolution system was crafted by congressional Democrats to assuage the anger of votes over the use of taxpayer money to bail out so-called “too-big-to-fail” financial institutions last year.
It would force large financial firms to absorb the cost of bailing out systemically risky financial firms.
Several trade groups representing large insurance companies wrote a letter today to the Senate Banking Committee asking them not to include the provision establishing the risk resolution fund in the House bill in the companion bill that is being drafted.