On Tuesday, November 18, 2008, the House Committee on Financial Services held a hearing regarding oversight of the Economic Stabilization Act of 2008 (the “Act”), government lending and insurance facilities, and their impact on the current economy and credit availability. We previously reported on the Act here and here.
Cam Finlay, Executive Vice President and General Counsel of Aon Corporation, presented testimony on behalf of the Council of Insurance Agents and Brokers (the “CIAB”). Mr. Finlay testified that the CIAB believes that the best course of action to restore liquidity to financial institutions is to create an insurance program for their illiquid assets. As we previously reported here, Section 102 of the Act grants the Treasury the authority to set up an insurance program for troubled and illiquid assets for financial institutions participating in the Troubled Asset Relief Program. The Treasury has not yet created an insurance program due to Treasury Secretary Paulson’s decision not to use the funds authorized by Congress to purchase troubled assets from financial institutions. Therefore, Aon recently proposed an insurance program to the Treasury (the “Proposed Program”).
The Proposed Program is a combination of risk retention, risk pooling and government guarantees. Participants would pay a premium to pool their illiquid assets and insure them against a decline in value. The pool would guarantee a portion of the illiquid assets’ principal and interest. The government would lend the pool money should payments exceed premiums, and would be reimbursed in following years through collected premiums. The Proposed Program would reduce the loss suffered by participants if the illiquid assets market value drops below their intrinsic value.
Mr. Finlay testified that the Proposed Program would provide several benefits, including: (1) the Proposed Program is mainly self-funded so it requires less cash than the capital infusions currently being provided by the Treasury; (2) it would give asset holders more opportunity to hold illiquid assets until maturity or until the market improves; and (3) the Proposed Program could assist homeowners by allowing participants to spread the cost of mortgage of mortgage defaults over time.
For a complete copy of the Aon’s testimony, click here.
To view a webcast of the hearing and other filed testimonies, click here.