Greed is good up to a point, but beyond that point, it turns financial wizards into financial retards. Having been nearly destroyed by the securitization of mortgages, Wall Street is now casting a venal eye at bundling life insurance policies. This is like a drunk switching from vodka to scotch and expecting a better outcome.
According to Sunday’s New York Times, here’s how it works: Say grandpa has a $2 million life insurance policy for which he pays an annual premium of $50,000. If he tried to cash it in before croaking, he’d get a paltry $58,000.
Along comes a “life settlement company” and offers him $215,000 for the policy. They continue to pay the premiums on the expectation that he is going to kick off in a couple of years, at which time they will collect on the policy and make a bundle. Such companies are already in existence.
The banks want to add a new wrinkle by bundling these purchased policies into bonds, which they would slice, dice and trance so each bond would minimize risk by bundling a variety of life expectancies and diseases.
They plan to sell these bonds to the pension funds they burned with their mortgage bonds.
Now, the problem is that the longer people live, the smaller the return on investment is.
Not to worry! The same mathematical geniuses who figured out how to slice and dice mortgages are on the job! Their solution is, “A bond made up of life settlements would ideally have policies from people with a range of diseases—leukemia, lung cancer, heart disease, breast cancer, diabetes, Alzheimer’s.”
This conjures up a warm image of gramps in his hospital bed, wires and tubes running into what’s left of his body as the medical expenses add up at a frightening rate, when suddenly a savior appears in the form of a “life settlement” salesman who offers gramps 22 cents on the dollar if gramps will just sign over his policy.
With a trembling hand, he signs the policy over. Gramps’ family is screwed out of a hunk of change, and a bond holder stands to make a healthy profit when gramps croaks. (Should the Angel of the Lord come down and lay a healing hand on gramps forehead, the bondholder loses money. But if the “life settlement” companies only work the terminally ill, most of whom are too drugged to think clearly, they minimize that risk.)
Let us not call them vultures because that would be an insult to a noble bird. And I am sure they have enough integrity that they would never think of working in cahoots with a life insurance company to deliberately sell life policies to the aged and ill with an eye to buying them back at pennies on the dollar just so they can be securitized.
That would as dishonest as approving a mortgage for someone who didn’t have a dime to their name.