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Banksters to bet trillions on decreased life expectancy with "securitized life insurance"

From today's Times:

After the mortgage business imploded last year, Wall Street investment banks began searching for another big idea to make money. They think they may have found one.

The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.

The earlier the policyholder dies, the bigger the return — though if people live longer than expected, investors could get poor returns or even lose money.

Wall Street is racing ahead for a simple reason: With $26 trillion of life insurance policies in force in the United States, the market could be huge.

Well, I guess that tells us what the smart money thinks about the health care effects of the Democrat's health care insurance reform, right?

Look, I'm not saying that the banksters are planning for peasant die-back (as in Russia); what I am saying is that they're incentivizing themselves for it.

And then there are the details, like the usual rent-seeking behavior:

Either way, Wall Street would profit by pocketing sizable fees for creating the bonds, reselling them and subsequently trading them.

Because it's all about the fees*, baby!

And just because you might think The Big Fail is a FAIL -- like if you lost your house, your job, or your health -- that doesn't mean the banksters think it's a fail. At all. Why would they? Our pain is their pleasure:

The debacle gave financial wizardry a bad name generally, but not on Wall Street. Even as Washington debates increased financial regulation, bankers are scurrying to concoct new products.

In fact, the banksters are taking all the machinery they developed for mortgage-backed securities (remember "toxic assets"?) and applying them to this new, exciting line of business:

Some financial firms are moving to outpace their rivals. Credit Suisse, for example, is in effect building a financial assembly line to buy large numbers of life insurance policies, package and resell them — just as Wall Street firms did with subprime securities.

The bank bought a company that originates life settlements, and it has set up a group dedicated to structuring deals and one to sell the products.

And guess who's racing ahead? Why, our old friends:

Goldman Sachs has developed a tradable index of life settlements, enabling investors to bet on whether people will live longer than expected or die sooner than planned. The index is similar to tradable stock market indices that allow investors to bet on the overall direction of the market without buying stocks.

It's amazing that Goldman Sachs can do all that, and run the government, too!

And -- unlike the subprime mortgage business -- it's not like there's any fraud involved here. Oh, wait...

But the ["life settlement"] industry has been plagued by fraud complaints. State insurance regulators, hamstrung by a patchwork of laws and regulations, have criticized life settlement brokers for coercing the ill and elderly to take out policies with the sole purpose of selling them back to the brokers, called “stranger-owned life insurance.”

In 2006, while he was New York attorney general, Eliot Spitzer sued Coventry, one of the largest life settlement companies, accusing it of engaging in bid-rigging with rivals to keep down prices offered to people who wanted to sell their policies. The case is continuing.

Predators in the life settlement market have the motive, means and, if left unchecked by legislators and regulators and by their own community, the opportunity to take advantage of seniors,” Stephan Leimberg, co-author of a book on life settlements, testified at a Senate Special Committee on Aging last April.

And look, it's not like the whole sca--scheme depends on ratings agencies with conflicts of interest, or deals so obfusc--complex it takes nuclear physicist to figure them out. Oh, wait....

While that idea was, in retrospect, badly flawed, Wall Street is convinced that it can solve the risk riddle with securitized life settlement policies.

That is why bankers from Credit Suisse and Goldman Sachs have been visiting DBRS, a little known rating agency in lower Manhattan.

In early 2008, the firm published criteria for ways to securitize a life settlements portfolio so that the risks were minimized.

Interest poured in. Hedge funds that have acquired life settlements, for example, are keen to buy and sell policies more easily, so they can cash out both on investments that are losing money and on ones that are profitable. Wall Street banks, beaten down by the financial crisis, are looking to get their securitization machines humming again.

To help understand how to manage these risks, Ms. Tillwitz and her colleague Jan Buckler — a mathematics whiz with a Ph.D. in nuclear engineering — traveled the world visiting firms that handle life settlements. “We do not want to rate a deal that blows up,” Ms. Tillwitz said.

No, no, of course not....

And it's not like the whole frau-innovation depends on computer simulations that may or may not line up with real world expectations, right? Oh, wait...

If the computer models were wrong, investors could lose a lot of money.

As unlikely as those assumptions may seem, that is effectively what happened with many securitized subprime loans that were given triple-A ratings.

And it's not like everything could all blow up at once, ever again, right? Oh, wait...

Despite the mortgage debacle [for whom?], investors like Andrew Terrell are intrigued.

Mr. Terrell was the co-head of Bear Stearns’s longevity and mortality desk — which traded unrated portfolios of life settlements — and later worked at Goldman Sachs’s Institutional Life Companies, a venture that was introducing a trading platform for life settlements. He thinks securitized life policies have big potential, explaining that investors who want to spread their risks are constantly looking for new investments that do not move in tandem with their other investments.

“It’s an interesting asset class because it’s less correlated to the rest of the market than other asset classes,” Mr. Terrell said.

Of course, of course.

And anyhow, the academic economists are giving it all the seal of approval!

“These assets do not have risks that are difficult to estimate and they are not, for the most part, exposed to broader economic risks,” said Joshua Coval, a professor of finance at the Harvard Business School. “By pooling and tranching, you are not amplifying systemic risks in the underlying assets.”

Of course, of course.

Well, back to paragraph one. Since the banksters make more money if people die earlier... Well, that's the incentive, right? With all the "risk management" stuff being so much window dressing?

[pounds head on desk]

NOTE I read this paragraph, and honest to gawd, I checked the calendar to see that it wasn't April Fool's Day:

But even with a math whiz calculating every possibility, some risks may not be apparent until after the fact. How can a computer accurately predict what would happen if health reform passed, for example, and better care for a large number of Americans meant that people generally started living longer? Or if a magic-bullet cure for all types of cancer was developed?

Well, they can't. But -- just to take a hypothetical example, here -- if a billionaire bet a whole lot of money that life expectancy was going to go down, what would he do to safeguard his investment? Pay the computer programmer to build a better model of the world? Or program the world by buying a Congress critter or two to make sure that health reform never happened, and making sure that Big Pharma put plenty of money into marketing, and little into basic cancer research? Reflexivity...

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Damon's picture
Submitted by Damon on

Let's just cut to the chase and go straight to death panels. But, instead of it being for cost savings, it'll be for direct profit. Haw.

Seriously, there is so much wrong with this, I'm not sure where to begin. First, these 'settlements' nearly completely defeat the purpose of life insurance. Then you've got an entire industry, now, built on targeting seniors for life insurance just so they can sell them off to parasitic investors whose sole hope is that they die earlier than expected to get bigger pay-offs which in turns helps sink life insurers.

They've lost at the craps table, so now they are going to try their hand at the poker table, right? Fuck you, too, parasites, and your utterly depraved death bets.

Submitted by cg.eye on

with Corporate owned life insurance -- what Walmart took out on its employees while giving them crap life and health policies. Until it was curtailed, COLIs provided companies with pension funding through taking out policies on people without their explicit knowledge. Even if a nominal life insurance policy was handed out at the same time, the payouts overwhelming benefited companies -- that is, until Congress actually did something about it:

The new pension bill (H.R. 4) strikes another blow against corporate-owned life insurance. The bill, which will apply to policies issued after the day the president signs it (expected to be August 17), will restrict the tax-free status of corporate or bank-owned life insurance to a narrowed class of employees, and then only if an elaborate set of notifications are made and documented.

This is a big deal in the insurance world because it fences in the sacred tax-free status of life insurance proceeds. Many tax shelters in the 1990s were set up to game this tax-free status, including the notorious "dead peasant" policies.

It's funny how they no longer use "viatical settlements" to describe life insurance finance deals -- guess that term has the taint of AIDS deaths and old folk remortgaging their houses to it.

bendjamin's picture
Submitted by bendjamin on

In Georgia, in fact, employers can even collect death benefits on the children and spouses of their employees.

Many states, including New York, California, Michigan, Ohio and Minnesota, require employers to get workers' prior consent, even though many workers may not be fully aware of what they are consenting to.

As a result, most employees have no clue that they are covered. Court documents show that CM Holdings not only didn't ask for employee consent, but hid the janitors coverage internally as well. The company is battling the Internal Revenue Service over tax deductions taken in connection with the policy.

Unions may have some ability to force companies to disclose whether they have janitors life insurance, under National Labor Relations Board rules, says Jon Hiatt, general counsel for the AFL-CIO. Now that they know about it, "there will very likely be a number of unions seeking to find out about the practice," he says.

ANOTHER REASON WHY REPUBLICANS HATE UNIONS.

RedQueen's picture
Submitted by RedQueen on

Over a year ago, I said life insurance was going to be the next mortgage backed security.

(I just wanted to toot my own horn)