The New-and-Improved (?) Wall Street is betting on death.  They’re for it.  Yes, from those delightful folks that brought us MBS (mortgage backed securities) and CDS (credit default swaps), the instruments that in turn brought us GFM (global financial meltdown), we have a new candidate:  pools of securities backed by “life settlements”.  I’ll let Marshall Auerback and L. Randall Wray explain from BANKS RUNNING WILD: THE SUBVERSION OF INSURANCE BY “LIFE SETTLEMENTS” AND CREDIT DEFAULT SWAPS.  See also: Wall St Just Doesn’t Get It.

Oblivious to any lessons that might have been learned from the global financial mess it has created, Wall Street is looking for the next asset bubble. Perhaps in the market for death it has found a replacement for the collapsed markets in subprime mortgage–backed securities (MBSs) and credit default swaps (CDSs).

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Selling Death

Under Wall Street’s new proposal, investment banks will package life insurance policies of individuals with an alphabet soup of diseases: AIDS, leukemia, lung cancer, heart disease, breast cancer, diabetes, and Alzheimer’s. The idea is to diversify across diseases to protect “investors” from the possibility that a cure might be found for one or more afflictions, thus prolonging life and reducing profits. These policies are the collateral behind securities graded by those same agencies that thought subprime mortgages should be rated as safe as U.S. Treasuries. Investors purchase the securities, paying fees to mortgage banking originators. The underlying collateralized humans receive a fraction of the death benefit up front as a single payout. Securities holders pay the life insurance premiums until the “collateral” dies, at which point they receive the death benefits. Naturally, managed money hopes death comes sooner rather than later.

Moral hazards abound. There is a fundamental reason why you are not permitted to take out fire insurance on your neighbor’s house: you would have a strong interest in seeing that house burn. If you held a life insurance policy on your neighbor, you probably would not warn him about the loose lug nuts on his Volvo. (If you had lost your job and were sufficiently
challenged ethically, you might even loosen them yourself.)

Sure. Why not let Big Pharma develop failed drugs, lie to the FDA (which they largely control anyway), and sell them to a sick public. But Big Pharma could simulaneously hold ‘life settlement securities” on it’s customers and profit big-time when the customers die despite the drug use.  Or, what happens when some “life settlements fund” manager finds his underlying insureds living too long.  Rate of return on the fund suffers. That hurts ability to raise money for a new fund. That kills this year’s bonus.  Oh what to do?  Maybe that poor Wall St fund manager will find a mobster willing and able to “facilitate” faster deaths among the underlying pool and save this year’s bonus.   The possibilities are endless…….    Unfortunately, the likelihood that government will regulate or outlaw such behavior isn’t likely.