October 6, 2009

Matt Taibbi: Wall Street Is Now Gambling on Grandma's Death

Full Article at TrueSlant.com

"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.

Spokesmen for Credit Suisse and Goldman Sachs declined to comment."

via Back to Business – Wall Street Pursues Profit in Bundles of Life Insurance – Series – NYTimes.com.

I’m sort of surprised that this didn’t get more attention. It looks like Wall Street is developing a new use for the securitization process — bundling life insurance policies and selling them as bonds to investors who would be betting, in essence, on when the policyholders will die.

The mechanism here is basically the same as the one used for mortgage-backed securities. Wall Street buys up life policies from elderly or ill people, who sell them for up-front cash that can be enjoyed before actual death (similar to those brokered arrangements with terminally ill HIV patients that received so much attention in the late eighties). They then take those policies and dump them into a securitized pool, where they can then be packaged as bonds and sold to investors who would get paid off when the policyholders die.

The mechanism works exactly the same as it did for MBS; in both cases the bank issuing the bond receives regular income in exchange for a promise to pay a lump sum when there is a “reference event,” which with mortgages is a default, but in this case would mean death.

What’s very amusing about this New York Times article is that, while describing this, there is no passage that reads anything like, “This utterly insane plan, which will condemn all those involved with it to an eternity of elaborate torment in the afterlife, is ironically being promoted by the very institutions that only just recently tried to destroy the world by creating similar casino-like gambits based on home ownership.”

The article does discuss the probable negative consequence that will come with a severe drop in the number of lapsed policies (until now, there were always a certain number of people who would let their insurance lapse either because they outlived their beneficiaries or could no longer afford the premiums; now, they will simply sell their policies instead of letting them lapse). The likely result here is higher premiums across the board for the ordinary person, which I suppose is an important point to consider.

But even beyond that… what the fuck??? This feels like financial innovation as practiced by Josef Mengele meets the Zucker Brothers; not just evil, but wacky evil. I don’t even want to think about what happens when Goldman Sachs suddenly has a large financial stake in the premature deaths of a bunch of old people. Where are the crazy police? Where is the crack federal crazy squad with the big butterfly net? I don’t know about betting on anyone’s life expectancy, but I think I’d like to bet on whether or not this idea ends well.

Full Article at TrueSlant.com

1 comment:

  1. Since i work in the insurance industry i can tell you our eye is very close to this new trend. actually as a company we are just now reorganizing our mortality tables to be more competitive with our direct competition.

    you were talking about end cosequences so here is what i forsee: the biggest issue with gambling on death is the battle between accurate actuarial measurment, advancement in health care, and inflation. like you pointed out, this scam is all aobut money now! (sounds oddly familar). The people selling their policy often aren't taking into account all the consequences of releasing their contract to a bank - like mortgage buyers duped into tricky loans. then the investors into the life insurance pool aren't investigating the fine details of the contracts they have with the banking institutions. while they give money (pre inflation dollars) to the banks now, the banks don't have to pay until later. if the banks actuarial numbers are off even just five years the effect on the investment is dramatic. once again the big banks in this country have cooked up another methlab type scheme to get profits now. we can only hope this drug lab gets shut down before it blows up.