Here we go again
9 September 2009 by Christopher SuleskeAPPARENTLY not having learned a lesson, and searching for a new income stream, Wall Street is crafting yet another class of derivatives, this one particularly morbid. Writes Ian Mathias:
Since it worked so well the first time around, Wall Street has spawned a new age of securitization — instead of mortgages, this time it’s life insurance policies. Before we spit on this one, here’s how it works:
- A senior with a high-premium life insurance policy, for one reason or another, choses to cash out
Instead of taking a “cash surrender” directly from the insurance company, the old fella sells his policy to a “life settlement company”- That company pays him a larger amount than the “cash surrender” would pay, but not nearly the totality of the policy’s value.
- The company keeps paying the premiums. When he kicks the bucket, the company collects the insurance policy.
That’s where the story would normally be over. But now, just like pools of subprime, Alt-A and prime mortgages, investment bankers are crafting securitized pools of these insurance polices. Basically, they pool together a bunch of beneficiaries that will likely die around the same time, buy up their policies from life settlement companies, package them into securities and sell them to investors around the world.
The way this would be set up, there is motive for policy holders to die earlier! This would seem to nastily coincide with the “death panels” mentioned in the debate re: health care reform. Geesh.
I would suspect this will work like the securitized subprime mortgages did: initial high profits, followed by a bubble and a collapse. If you can sleep at night, i.e. the ethical issues do not bother you, there should be profits to be made early. Only early.