I’m really proud that we scooped the NY Times by 3 months on a story they published today.
Still Death Bonds by Any Other Name
And while we called them Death Bonds, the Times’ headline beats around the bush:
Wall Street Pursues Profit in Bundles of Life Insurance
On the other hand the Times article is very in-depth and up-to-date. When we wrote about this new ‘investment vehicle’ back in June very little information was publicly available. All we could do was predict that this would become a big business for Wall Street. And it looks like it is going to be huge.
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.
Either way, Wall Street would profit by pocketing sizable fees for creating the bonds, reselling them and subsequently trading them.
But with all the anti-Wall Street hoopla that this publicity will generate, I’ll reiterate what I said originally and which is lost in the Times’ article. It’s not such a bad idea for a number of people near retirement who have had their savings decimated. Here’s what I said:
In these tough economic times, some folks are using Reverse Mortgages to access the equity in their homes and get cash either for spending or to pay off their conventional mortgage. It’s an idea whose time has come; and not a bad option in some circumstances.
But even better, especially if you are further from your Sell-By Date and not old enough to qualify for a Reverse Mortgage is the Life Settlement agreement. Think of it as a way to tap the equity in your soul.
[But be really careful, you are dealing with the Financial Devil.]
I’ll offer these (slightly updated) teaching points to folks considering the option:
- Retirees and Bond Buyers beware; you are nothing but a commodity with a Sell-By-Date.
- Contrary to popular belief, your value increases as you approach your Sell-By Date.
- Retirees, rather than fearing your final time on this earth, it’s now more appropriate to look forward to what we’ll call your Money Moment.
There you have it, negotiate in good faith. And if you seriously consider getting involved either as an investor or the seller of the insurance policy, make sure to read that Times article!
Not A Mystery 
Lies.
Wall Street isn’t trying to profit by giving people bigger payouts, they are trying to profit on a loophole in insurance policies. Right now, most people at some point will quit paying premiums and drop their policies. In this case, the insurance company collects payments for years and never pays out. This is reflected in the price of the policy- they cost less than they “should” for people who make every payment. Wall Street wants to exploit this pricing scheme; their bundled securities will never miss a payment so they effectively screw the insurance companies.
This would be fine, but the bias in the article you cite is maddening. In the illustration they printed with their article, they say that currently, their example consumer could cash in their policy for $58,000. They estimate that if this wonderful policy passes, the consumer will get $215,000 instead. They have got to be kidding… have they not been paying attention the last few years?
A more likely scenario is the customer gets $58,500 and Wall Street pockets $156,500. And guess what? Everyone’s life insurance rates go up substantially.
Its wonderful that Wall Street is figuring out another way to make billions without doing anything productive.
But why don’t you ferret out the real story, Bobbie-O? Your readers rely on you.
Posted by Matthew | September 7, 2009, 4:32 amMatthew,
I don’t think the article is ‘biased’ as much as focused on issues for investors and regulators. It does point out the cash-out loophole early on but doesn’t come back to it.
We have three sets of bad guys: [1] The Wall Street Bankers who want to securitize the product and make their bundle in fees, [2] The insurance industry who have been screwing their policy holders for years by giving them miserable cash value payouts if they stop making payments, [3] The inevitable bunch of scam artists who will try to screw both the policy holder AND the investors.
We can take our pick who we’d like to pitchfork first.
My focus is to try and warn policy holders AND investors that there are industries waiting to get rich off them, and don’t give a damn about them.
I think it was Warren Buffett who said the average investor could never really make money because of ‘friction’ in the financial system. ‘Friction’ were the fees and commissions being scammed from typical investors by all the ‘Product Providers’ and ‘Producers’ they had to go thru to make their investments.
And in the end it turned out that even the non-typical investor with tons of capital got screwed by the biggest ‘Frictionizer’ of them all, Bernie Madoff.
One final note that the article ignored: I believe the insurance industry is the single largest group of investors in the world, since all those premiums we pay are invested by them to generate the money for claims when they come due. So when the article implies it’s the investors against the insurance industry that’s not quite the whole story.
P.S. I might ask you to do a guest post on this in the future.
Posted by Bob Gelber | September 7, 2009, 8:40 amLet’s see. I pick pitchfork behind door number one. No, wait, door number three. No, wait, two! Sheesh. This is depressing (but good).
~~~
Looking forward to more.
Posted by Heather | September 7, 2009, 10:35 pm