Wall Street to Cash in on Death
Sunday, September 6, 2009
The New York Times published a pretty creepy article on Saturday (September 5th). The article focuses on Wall Street’s new plan to make money. What’s so bad about Wall Street making money?
Well, their new plan is to buy life insurance plans from elderly and sick people for cash. The example that the New York Times gives is someone selling a million dollar policy for a $400,000 payout, but the payout amount would all depend on the seller’s life expectancy. These “life settlements” would then be bundled together to form bonds that can be sold to investors. The investors would start paying for the person’s policy from then on. When the person dies, the investors collect on the policy. Apparently, the faster the person dies, the more money the investors make. However, regardless of whether you die sooner or later, Wall Street firms will profit off of fees collected from creating the bonds and facilitating transactions. You could say that Wall Street is planning to “securitize” people’s lives (or deaths, as it may be) into a kind of CDO. And we all know how great that whole CDO adventure played out for Wall Street, right? What could be dangerous about creating a similar class of financial products with sick people’s life expectancy as the focus?
Apparently, these type of “life settlement” investments aren’t new for banks. They already exist in a lot of portfolios. Whats new is the plan to securitize these “life settlements” and market them as a big-time asset class of their own. Keep in mind, this isn’t something banks are just talking about potentially doing. The Times states that Credit Suisse is “building a financial assembly line to buy large numbers of life insurance policies, package and resell them — just as Wall Street firms did with subprime securities.” Estimates are putting the market for this class of investment product at $500 Billion, according to the article. I don’t doubt it one bit. Considering how many people are losing their jobs or facing pay cuts and how high medical bills are these days, does anyone really doubt that there are a whole lot of elderly and sick people out there who would be eager to sell their life insurance policies for an immediate cash payout? Especially if they foresee a future inability to pay their premiums?
So whats the upside? Right now a lot of people just let their life insurance policies lapse. If they’re lucky they’ll still get a small payout but its usually not much compared to the premiums they’ve payed up to that point. Under this “life settlement” proposal, policy sellers get a bigger payout and eventually investors get their payout too. So insurance companies end up paying out on their policies more often than they do now. But, insurance companies could end up just raising rates and premiums to make up for the difference, which could end up leaving the average policyholder worse off. Wall Street profits. Insurance companies profit. The consumer pays up.
Still, its hard to really get that angry over a proposal like this. As I pointed out, these type of “life settlements” are already held in a lot of investment bank portfolios. And, who am I to say what kind of financial relationships elderly and sick people should or shouldn’t engage in?
But there are so many disturbing ramifications that come out of this proposal that I can’t help but be worried. The article mentions that investors lost out on these type of investments in the ’80s when people with AIDS ended up living longer thanks to new medications. It also mentions that risk managers are planning on diversifying these bonds based on illness type. If one bond happens to represent too many people who all have one type of illness, then that bond could prove to be unprofitable if a cure for that illness is ever discovered. Am I the only one who finds it disturbing that it’ll now be in the interest of some Wall Street investors for sick and old to people to die faster and for certain medications or medical procedures to be suppressed or kept inacessible to the public if they’re too successful at actually making people live longer? I mean, don’t some of these major banks also have large stakes in pharmaceutical and healthcare companies? Couldn’t that present a very serious and disturbing conflict of interest? The article doesn’t address these questions.
Then theres this:
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.
So, not only will investors be making money when some people die but some investors will also be making money by simply placing bets on life expectancy in a kind of virtual market. Great. Thank God we bailed out these banks, otherwise they wouldn’t have been able to come up with these great investment products that will surely work to make America more economically competitive with the rest of the globe.
Seriously, how predatory can Wall Street get? Whats the thought process here? “I guess if the American consumer is too tapped out to buy our junk we’ll just reap profit from his death and place secondary bets on the over/under for his life expectancy”? I mean, people aren’t going to sell their policies for “life settlements” just because. Usually its because they have too much debt, lost their job or because they simply can’t afford the medical costs of staying alive otherwise. So the American consumer is really being squeezed for every last cent he can cough up here. All of this almost sounds like a slur a communist would attack American capitalism with (“Wall Street profits off of death!”) but its reality. I guess that’s how deranged and parasitical some aspects of American so-called “free enterprise” have gotten.
Welcome to the Brave New World, I guess? So let me know, how do you feel about this whole plan?
You can find the article here: ‘Wall Street Pursues Profit in Bundles of Life Insurance‘
It is ilegal in most states it is illegal (at least it used to be) for third parties without an insurable interest to take out insurance on an individual. This smacks of the same thing a least in spirit. If this actually starts, what would be wrong with me, as an individual, taking out a bunch of life insurance on myself and then selling it to Wall Street. For example, why shouldn’t I take out $2 or $3 million in insurance, sell it to Wall Street for say $1 or $1.5 million and then live on that money received while Wall Street pays the premiums until I die? Seems like a good way for an individual to never have to work again. Certainly, the present value of any policy taken out is a lot more than the one or two premiums the invidual would have to pay before selling to Wall Street. And Wall Street will then pay some amount less than the total expected present value which should still be a good return for the individual. It gets more interesting: Would the less than ehtical investor groups try to get thier money sooner by “helping” the various insureds die sooner than they othrwise would…
Does anyone remember the scandal, back in 1980, in which nurses were [wrongly] accused of betting on the date and time of their patients’ deaths? There was a public outcry, as the potential conflict of interest was obvious . . . . . This setup poses the same risks, only on a massive scale . . . . And with the potential of manipulating the insured’s lifespans without any traceable evidence of ill intent . . . . Very disturbing, indeed.
Certainly, the present value of any policy taken out is a lot more than the one or two premiums the invidual would have to pay before selling to Wall Street.
Let’s think about that. Say you bought a million-dollar policy on yourself. The actuaries say your chance of death this year is 250 in 100,000. So the average expected value of this policy is .0025 ($1,000,000) = $2,500.
Obviously for one policy, the outcome is binary — the payout is either zero (usually), or one million (occasionally). But for a large group of similar policies, the average expected payout per policy would be $2,500.
So, I don’t see why Wall Street would pay any more than $2,500 for the policy. As you alluded to, probably they would buy it at a discount — say $2,000 — and then sell it for full freight, pocketing the $500 difference for themselves. They can get away with that, because only large players have the capital to purchase enough policies to play this game.
Or to say it a different way, the premium paid for a policy should be equal to its present value, plus the insurer’s profit. Otherwise, the insurer is giving away present value to the insured, without compensation. Not gonna happen. The present value can only be radically higher than the premium paid if the beneficiary has inside knowledge that death is going to occur much sooner than the actuarial probability would indicate.
For a large group of policies, something like epidemic disease would be required to hit the jackpot. But the solvency of life insurers would be questionable if the death rate rose radically, as it did during the 1918 Spanish flu.
* SIGH *
It’s really tough finding a “license to print money.”
Same subject, but different article with a little more detail in it. Quite a perverse system we have. :
“Death Bonds”: Wall Street’s Shocking New Plan to Reap Billions off Dying Americans
By Mark Ames
Posted on September 10, 2009
Now we know why America’s oligarchs are fighting to keep the rest of us stuck in the world’s worst health care system: the more we die, the more billions Wall Street will earn. A recent article in The New York Times exposed how Wall Street is licking its lips over a new scheme to make hundreds of billions in profits by creating financial instruments that will profit off of millions of terminally-ill Americans’ agony, desperation, and death. The only thing standing in the way of this massive new Wall Street scheme is the kind of health care reform that might allow Americans to live longer lives. Yep, this is what we spent trillions of dollars bailing out Wall Street for: so that they can kill us for profit.
It sounds like something out of an old sci-fi flick like War of the Worlds, with America’s billionaires as the brutal aliens harvesting our humanoid blood and tissue to fertilize their country club golf courses. Yet it makes logical sense: Wall Street has nowhere else to turn for its fat profits. Our banking class has already destroyed everything else in this country that had any value, from America’s industrial base to the American Dream itself, its housing market–whatever Wall Street could securitize, leverage, flip or restructure, they destroyed for good. There’s nothing left to strip and pawn — except for our lives.
Yes, it’s sick as hell, so vile and evil that it almost defies understanding. But I’ll try: see, if I was a gambling man, I’d wager that the thing that gave our banker billionaires the idea to turn our deaths into “death bonds” was the way they so effortlessly looted trillions of taxpayer bailout dollars from us, so quickly, and with so little resistance. That puts bad ideas into bad people’s heads. You and I, if we were the ones who got those trillions in our time of need (rather than having it stolen from us in our time of need), we might have a real sentimental epiphany, like, “Gee, the American taxpayers saved me from ruin! I promise from now on to change my ways and do whatever I can to repay these kind Americans!”
But in our real world, instead of having Scrooge epiphanies, our Wall Street bankers have Goodfelllas epiphanies. As in, “That was the easiest $23 trillion bucks anyone ever stole, fellas! Come on, let’s go back and steal some more! There’s gotta be a lot more where that came from!”
They’re not only not scared of the consequences, they’d be crazy to worry given the recent evidence. By our passivity, we’ve emboldened our vampire-oligarchs to steal more from us, and drain our blood for good measure. So now they’ve come up with the most shameless profit scheme ever imagined: issuing “death bonds” and securities based on these “death bonds” which aim to profit from people suffering from agonizing terminal illnesses.
Here is how the Times explains it:
After the mortgage business imploded last year, Wall Street investment banks began searching for another big idea to make money. They think they may have found one.
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.
The earlier the policyholder dies, the bigger the return — though if people live longer than expected, investors could get poor returns or even lose money. [Author’s emphasis]
So let’s get this straight: Wall Street needs its hundreds of billions in paper profits. That’s a given. But since they’ve already destroyed everything else while plundering that wealth, now Wall Street is going to suck those profits directly out of our veins:
[E]ven 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, to $169 billion so far this year from a peak of $941 billion in 2005, according to Dealogic, a firm that tracks financial data.
The most common defense of securitization you hear from finance apologists is that securitization lowers the price of borrowing–without securitization, home mortgages would have been much more expensive, they say (ignoring of course how securitizing subprime loans destroyed the entire real estate market for millions upon millions of Americans). But in the case of securitizing life insurance payouts, the effect right away will be higher premiums on new life insurance policies, according to a Wharton professor–meaning securitization won’t even pretend to lower premiums, but rather will put life insurance out of more Americans’ reach before destroying the entire industry.
So, guess who’s planning to profit from our terminal illnesses? Yup, our ol’ friends at Goldman Sachs. The Bailout Barons at Goldman are so excited by all that juicy death that they’ve already invented a kind of death index “enabling investors to bet on whether people will live longer than expected or die sooner than planned.” That is not a made-up quote, folks: that’s straight out of The New York Times business section.
Here’s how the whole thing will work: life insurance is a $26 trillion industry. And of those $26 trillion in life insurance policies, there is always a certain percentage of policy holders who are facing imminent death. Not the kinds of deaths we all hope for — quick, painless, unforeseen–but the more common kind: the slow, painful, devastating deaths by any number of ailments — late-stage diabetes, lung cancer, devastating stroke, liver failure — deaths that bankrupt you and your family as you wage a losing struggle with your health insurance company from your death bed to get your pain medication restored or your hospice care nurse partially covered. You desperately search for a new source of money wherever it can be found — and wouldchaknowit, there’s a budding industry of life insurance vultures who make their living by snatching up a terminally-ill policy holder’s insurance for a discount. The life insurance vultures offer the desperate, dying holder that needed cash up-front, waits for the person to die, then cashes in on the full value of the policy. The quicker the death, the more the vulture earns. This transaction is what’s called a “life settlement.” (Wouldn’t Dracula love it if he could just call it a “life settlement” when he sucks a victim’s blood? “Look, I’m just securitizing your blood, hold still will ya? This is a free country, you know! Don’t tread on my fangs, socialist!”)
Now if you’re going to have every Wall Street bank hungry for “life settlements” to package and securitize, you’re going to need a lot of brokers to trawl the nursing homes, hospice centers and hospitals for “products” — dying Americans. Much more than we have now (just as the number of mortgage brokers exploded when Wall Street needed mortgages for their securitized products). These brokers try to get to the dying American before his life insurance company does, or someone else — and offers them a better cash settlement for the policy than the insurance company might offer. Everyone sees that dying policy-holder as a source of profit — but only if that person dies as soon as possible after you snatch up the policy. As you can imagine, the kind of person who makes a living trawling around hospice centers for life insurance policy holders isn’t the kind of guy you’d want to babysit your kid for the night — Philip Garrido might be okay with them, but you and I wouldn’t. Even before the Wall Street rush for “life settlements” to package, these brokers have already been accused of the lowest, vilest crimes:
[T]he industry has been plagued by fraud complaints. State insurance regulators, hamstrung by a patchwork of laws and regulations, 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.”
In 2006, while he was New York attorney general, Eliot Spitzer sued Coventry, one of the largest life settlement companies, accusing it of engaging in bid-rigging with rivals to keep down prices offered to people who wanted to sell their policies. The case is continuing.
“Predators in the life settlement market have the motive, means and, if left unchecked by legislators and regulators and by their own community, the opportunity to take advantage of seniors,” Stephan Leimberg, co-author of a book on life settlements, testified at a Senate Special Committee on Aging last April.
Okay, so one part of the equation is getting the product — dying Americans’ death policies. But the other part is calculating as accurately as possible the risk of the products. Now remember, the quicker the policy-holder dies, the bigger the profit. And this is where the vampire fangs come out. Because the biggest threat to investor profits is having these policy holders living longer than expected. As the article noted, such a thing has happened before:
[T]here is another potential risk for investors: that some people could live far longer than expected.
It is not just a hypothetical risk. That is what happened in the 1980s, when new treatments prolonged the life of AIDS patients. Investors who bought their policies on the expectation that the most victims would die within two years ended up losing money.
One way to deal with the “risk” of Americans not dying is by packing a bunch of dying people’s policies together, because you can get lucky with one disease, but you can’t help everyone live longer.
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.
Ah but wait, there is one potential deal-killer out there: if America’s health care system gets fixed, Americans might live longer, and Wall Street’s “death bonds” could mean the death of Wall Street rather than Main Street:
How can a computer accurately predict what would happen if health reform passed, for example, and better care for a large number of Americans meant that people generally started living longer?
If the computer models were wrong, investors could lose a lot of money.
As unlikely as those assumptions may seem, that is effectively what happened with many securitized subprime loans.
Ah yes, we must make sure that that doesn’t happen again!
So how will the billionaires make sure that they can harvest our blood and tissue like the War of the Worlds aliens, and turn it all into country club golf course fertilizer? First, by killing health care reform, which is all but accomplished. And then with their next fight, which they’re already gearing up for: killing the proposed Consumer Financial Protection Agency, which would protect Americans from exactly this sort of horrific predatory scheme.
Already, millions of finance industry dollars have been marshaled by finance industry-backed trade groups (millions that they stole from us taxpayers thanks to the bailout), including the Financial Services Roundtable, the Mortgage Bankers Association, the US Chamber of Commerce and the inconspicuous-sounding American Land Title Association.
This last one, the ALTA, is more important than it sounds in this fight, particularly since it’s headed up by Kurt Pfotenhauer — husband of the even more notorious Nancy Pfotenhauer. Together they’re like the Wonder Goons henchmen couple working on behalf of America’s billionaire vampires. Before heading up ALTA, Kurt Pfotenhauer was the lead lobbyist for the Mortgage Bankers Association — which lobbied successfully to kill mortgage relief for distressed homeowners in order to protect securitization — the same securitization that will be used to profit from Americans’ deaths.
Nancy used to head up Koch-backed Americans for Prosperity until 2007 — yup, that’s the same group leading the town hall “grassroots” mob against health care reform, and which co-sponsored the early Tea Party protests. Nancy left AFP in 2007 to work for McCain’s campaign — she’s the one who famously divided Virginia into “real America” and the rest of us.
Ever since McCain’s campaign imploded, Nancy has been out there hitting the TV circuit attacking health care reform and financial regulatory reform, though I’ve yet to find out who’s paying her to do it. No need to ask who’s paying her husband Kurt, however. This past July, he headed an industry delegation to the White House to demand that Obama back off creating the CFPA agency. When he didn’t get his way, he slithered back into the dark.
This week, a new advertising/AstroTurf campaign to kill the CFPA was launched, including a website Stopthecfpa.com, sponsored by the U.S. Chamber of Commerce–the site prominently links up to ALTA. It’s no surprise that the Chamber of Commerce is behind the move to keep American carotid veins as vulnerable as possible to billionaire fangs.
The head of the Chamber, Thomas Donohue, is the perfect man to play the role of Dracula’s Assistant: his resume includes serving on the board of directors at Qwest during the period when Qwest was accused of one of the worst fraud scandals in corporate history, resulting in billions in overstated revenues, and criminal and civil charges against the CEO (who was sentenced to 10 years in prison) and eight others; the board of directors of Union Pacific Corp, when as head of the compensation committee Donohue approved some of the highest CEO compensation packages in history, including tens of millions to former CEO Richard Davidson, along with his $2.7 million annual pension when he retired in 2006; the board of directors of XM Radio, which is currently almost bankrupt and facing delisting; and the board of directors of a nursing home monolith, Sunrise Senior Living, which is being investigated by the SEC for fraud, and which today faces possible bankruptcy. (Not surprisingly, one of Donohue’s longest-running goal is to protect billionaires from lawsuits.)
This is the man heading a $2 million campaign to kill the Consumer Financial Protection Agency, so that our deaths can be more easily exploited.
It’s as if the billionaires are just playing with us at this point. As if they’re saying, “Hey, dumbfuck Americans! You can have your blood back when you suck it out of my cold dead veins! Oh wait, my veins are already cold ‘n dead. And rich!Ha-ha! Ah, I kill myself sometimes. Now, give me your fuckin’ neck, before I rip out your veins with my bare fangs!”
Read more of Mark Ames at eXiledonline.com. He is the author of Going Postal: Rage, Murder, and Rebellion: From Reagan’s Workplaces to Clinton’s Columbine and Beyond.
I would need to spend some more time to be sure but, here is an example:
A whole life policy (the only type to be absolutely guaranteed to exist if you pay premiums until you die) for a 40 year old average male will cost about $2,000 per year for the premium or about $167 per month. A 40 year old male has a life expectancy of about 77 years or 37 years until death. The present value of $100,000 37 years fro now at 5% interest is $16,443. If the 40 year old male bought the policy, paid say two months premium before selling it to a broker/consolidator for – say – $12,000 (leaving a lot of profit for the big investors), he would have turned a cash outlay of $334 into $12,000 in only two months! So, it seems clear that a person would be motivated to get as large a policy as they could get from an insurance company (and that could easily be $2 million for a middle class man with a family). Even just a straight multiplication of the $100k example to the $2 million would mean cash in the 40 year old males pocket of $240,000. Clearly not a massive sum but I can see how this would be very tempting for a lot of people. Then what would all of the “unintended” consequences of this be if this has been done on a massive scale… ???