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They'll bet your life
Here's an argument for why bailing out Wall Street might've been a horrible idea -- the bankers have little incentive to be careful. They're already cooking up the next exotic, dangerous way to make piles of money, and that could be to gamble on when the sick and elderly will die.
Marketplace's Amy Scott reported on the infancy of the idea a couple years ago. But now, the New York Times says this financial "innovation" is starting to take hold on Wall Street. Emphasis mine:
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.
Sound familiar? Oh, it gets better:
"We're hoping to get a herd stampeding after the first offering," said one investment banker not authorized to speak to the news media.
In the aftermath of the financial meltdown, exotic investments dreamed up by Wall Street got much of the blame. It was not just subprime mortgage securities but an array of products -- credit-default swaps, structured investment vehicles, collateralized debt obligations -- that proved far riskier than anticipated.
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.
But before we lump this idea in with previous schemes, let's take a closer look at it:
Defenders of life settlements argue that creating a market to allow the ill or elderly to sell their policies for cash is a public service. Insurance companies, they note, offer only a "cash surrender value," typically at a small fraction of the death benefit, when a policyholder wants to cash out, even after paying large premiums for many years.
Enter life settlement companies. Depending on various factors, they will pay 20 to 200 percent more than the surrender value an insurer would pay.
So, this is a public service for people who want to cash out their policies while they're alive. What's to stop someone from taking out a policy for the sole purpose of selling it back to the broker? More:
Not all policyholders would be interested in selling their policies, of course. And investors are not interested in healthy people's policies because they would have to pay those premiums for too long, reducing profits on the investment.
But even if a small fraction of policy holders do sell them, some in the industry predict the market could reach $500 billion. That would help Wall Street offset the loss of revenue from the collapse of the United States residential mortgage securities market...
The players are already lining up to get into life insurance bundling...
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.
The Times also talked to a ratings agency called DBRS, which is trying to come up with a "safe" formula for bundling life policies without the risks of previous securitization:
The solution? 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. That is because if too many people with leukemia are in the securitization portfolio, and a cure is developed, the value of the bond would plummet...
If a cure is developed, investors lose a ton of money.
WHAT'S WRONG WITH THIS PICTURE?
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Why would you sell your insurance policy for less than the death benefit if you were sick and considered terminal? Wouldn't your estate get more at death and you bet on your medical bills being less than the discount you would take on selling the policy? It doesn't make sense to me.
As far as getting a doctors "expert" opinion, you can buy that opinion, just like they did with Appraisers in the mortgage debacle.
Who would sell their policy? Someone who had outlived any/all beneficiaries, for one; decent reason, IMO. Someone whose medical bills were squeezing the life out of his/herself and possibly spouse; maybe necessary but deplorable--and a good reason why we need to fix the healthcare $y$tem.
But it's okay, cause at least these "Death Panels" aren't in the hands of the government! We know we can count on Wall Street to take good care of the sick and the elderly...er...
(Is the administration asleep? Why is this not getting pushed in the news?)
"President Franklin D. Roosevelt, in his speech accepting the Democratic nomination for a second term, delivered at Philadelphia on 27 June 1936, said, "The economic royalists complain that we seek to overthrow the institutions of America. What they really complain of is that we seek to take away their power. Our allegiance to American institutions requires the overthrow of this kind of power." He was referring to persons prominent in finance and industry who in general opposed his tendency to centralize the government and to put it into competition with private enterprise."
http://www.encyclopedia.com/doc/1G2-3401801313.html
The guy we elected president to clean up the mess and his political party are letting the royalists have their way, just as previous government regimes have done since Reagan. Bernanke and other establishment economists have opposed regulations that would interfere with "financial innovation" despite the fact that this distorts and undermines the productivity of all factors of production. Glass-Steagall could easily be reenacted. The 1999 law proscribing any regulation of derivatives could easily be repealed. It's as if these people want to create another bubble that they can call a recovery.
This is also a good way to ensure that a cure will never be developed for these diseases. It's not like the banking industry doesn't speak to the pharmaceutical industry.
On the other hand, clearly the profit is in lifetime treatment rather than cures, so this "life settlement" concoction may not affect development of cures anyway.
In regards to the article that appeared in this past weekend’s NY Times I felt it necessary to weigh-in on the issue.
First of all converting what would be an income tax free event, that being, a death benefit paid out to the initially designated beneficiary, such as a spouse or children, to an investor which would be taxable based on Rev Ruling 2009-14 would seem to me to be a thing the current administration would gladly support.
Second, policy holders are not being talked out of existing life insurance policies, they are attempting to receive an economic benefit greater than that being afforded to them by the life insurance company that issued the policy. They are going to surrender or let lapse a policy they no longer want or need.
Third, life settlements are for insureds that are NOT terminally ill but are over the age of 65.
This industry is regulated in many states to extent unseen or unheard of for any transaction involving insurance.
When a person purchases a life insurance policy, properly referred to as an insurance contract, they acquire certain rights. One of those rights recognized by the U.S. Supreme Court in 1911 was the right of the policy owner to sell their rights in the contract to a third party. The people who benefit from a life settlement are the ones who own those rights, namely the policy owner. How they benefit is by being able to obtain the true value of the policy instead of merely receiving the cash surrender value upon surrender or nothing upon letting the policy lapse. If a person no longer wants or needs their life insurance then why should they be denied the opportunity to receive a value greater than the cash surrender value but less then the death benefit? Instead it is the life insurance company that reaps the total economic benefit from the surrender or lapse.
How can a free market exist if it is not permissible for a policy owner to seek out the advice and counsel, for example, of their CPA, Lawyer, Insurance Agent, Financial Advisor or Financial Planner to help them determine what a fair value is? Or for that matter being prohibited from exercising a contractual right? Along the same line of reasoning, are insured’s capable of estimating whether or not the initial purchase of their cash value policies was a fair deal and that they were not being cheated?
When being sold life insurance in the first place the insured is being served by an AGENT of the INSURER. The agent is not a fiduciary of the insured. In regulated states the life settlement broker, is a fiduciary to the insured and policy owner to act in their best interests and to follow their instructions.
The life insurance industry has been putting in force policies based on lapsed based pricing assumptions, meaning they have full knowledge and belief that the policies will in fact lapse in 5-7 years therefore they fully expect that no claims will be paid. So would you then say that the public is being cheated because they bought permanent insurance which is under-priced knowing full well that the public is not going to reap any true financial benefit upon lapse or surrender?
Life insurance premiums are potentially on the rise because of stiffer reserve requirements set by the states, not because of life settlement activity. Remember “the [life settlement] market is still minusculeâ€.
The public should be concerned that there is an industry that readily admits that they do not want to face contractual claims they put in force for fear they will not have enough funds to pay them. That is the risk they face being an insurer and mispricing their policies.
The policy owner, the consumer, is the one that benefits from a life settlement. Why should they have this right and economic opportunity denied them?
Finally, the investors are large financial institutions and are already regulated. Perhaps the regulations already on the books need to enforced or enforced better.
I would be nervous of large investment houses or hedge funds working under the table to block corporate investment in cures, or pressuring government policy or individuals to not approve certain procedures or drugs. There can be many indirect ways to stymie innovation when there are significant financial gains to be made. Maybe my view of senior wall street execs is overly dark, but it's not unwarranted.
Can't you just already picture an episode of Law and Order where the detectives eventually discover that all of the victims had life insurance polices that had been securitized into the same bond? Call me paranoid, but I think I will not structure my financial life in such a way that complete strangers benefit from my early demise.
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