Wall Street to Make a Killing On Early Deaths

September 7, 2009 (LPAC)—According to the New York Times, Wall Street investment banks have been searching for an another exotic investment instrument with which they can literally make a killing.

The bankers' plan is to buy "life settlements," life insurance policies that ill and elderly people sell for cash— depending on the life expectancy of the insured person. The banks would then "securitize these policies by packaging hundreds or thousand together into bonds. They will then resell those bonds to investors, who receive the payouts when people with the insurance die.

The earlier the policyholder dies, the bigger the return. There is also an incentive to ensure that the policyholders do not live longer than expected, because the investor would then either get poor returns or even lose money.

For Wall Street it is a win-win situation, because the banks would profit with sizable fees for creating the bonds, reselling them, and then later trading them.

So far, there ae nine proposals for life-insurance securitizations from private investors and financial firms, including Credit Suisse, which are under review. With $26 trillion of life insurance policies in force in the United States, the market would be huge.

Credit Suisse has already purchased a company that originates life settlements and has set up a group dedicated to structuring deals and one to sell the products.

Goldman Sucks, an investment bank, never known to have passed up a lucrative killing, has developed a tradable index of life settlements, to let investors 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.

The life settlement industry has already been plagued by fraud complaints. State insurance regulators 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."

Last April, Stephan Leimberg, co-author of a book on life settlements, testified before the Senate Special Committee on Aging, that "Predators in the life settlement market have the motive, means and, if left unchecked ... the opportunity to take advantage of seniors."

But Andrew Terrell, who was the co-head of Bear Stearns' longevity and mortality desk—which traded unrated portfolios of life settlements—and later worked at Goldman Sucks' Institutional Life Companies, a venture that was introducing a trading platform for life settlements, thinks they have a big potential.

The only risk to investors is that some people could live far longer than expected. But then again, if the Obama health policy were to be legislated, with a T-4 board such as IMAC, or if the Liverpool Care Pathway took hold in the U.S., there would be virtually no risk at all.

Meanwhile U.S. Treasury Secretary Tim Geithner pontificated on CNN International on September 4, that "there is no risk that we can afford and [that] we will allow conditions in the financial industry to go back to what they were in the peak of the boom. It just can't happen, it's not going to happen. There's going to have to be a fundamental change. The critical failure in this crisis was to allow a huge buildup in leverage, in risk, to take place in banks across the world and in institutions that are like banks."