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$22B Bailout for Life Insurers: Mystery of Thursday's Rally Revealed! But Why Now?

Posted May 15, 2009 11:47am EDT by Aaron Task in Investing, Banking
Related: PFG, ALL, HIG, LNC, AIG, AMP, PRU

Updated from 11:47 a.m. EDT 

News the government is going to shower the life insurance industry with $22 billion of TARP funds solves one mystery: Why related stocks were curiously strong Thursday, prior to public disclosure.

Update: "The evidence is compelling that the big institutional money was betting on this TARP approval for the insurers," writes Jon Najarian, co-founder of OptionMonster.com.
"The other darker option would be that the big money was tipped off that the TARP news was pending. For my money I say there is no such thing as a coincidence on Wall Street!"

Najarian notes there were some unusually large bullish bets on several insurers Thursday via the options market:

  • Lincoln Financial (LNC) - 21,000 calls yesterday vs. 30-day average of 5,500
  • Prudential Financial (PRU) -  8,500 calls vs. 30-day average of 6,500
  • Hartford Financial (HIG) - 114,000 calls vs. 30-day average of 21,100
  • Principal Financial (PFG)- 8,700 calls vs. 30-day average of 1,600
"As smart money usually does, the buyers of these calls sold quickly" on Friday, he reports. "Or as I like to say, they took the money and ran!"

Earlier: Beyond the outrage of possible (even likely) insider trading ahead of the TARP announcement, this news raises other riddles Barack Obama, Tim Geithner and Ben Bernanke need to address:

  • Why does the line insurance industry need $22 billion of taxpayer funds?
  • Why now, in the wake of the post-stress test bank capital raises, market rally and growing sense the financial crisis is over?
  • How will the industry respond to the possible overzealous government oversight that comes with TARP funds?
  • What horse trading, if any, went on between the life insurers and the administration? Obama wants to remove about $12.8 billion of tax breaks from the life insurers to help pay for health insurance on the one hand, but is giving the industry a $22 billion boondoggle on the other.
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