Halloween is still a month away, but ghouls, ghosts and other grotesque creatures are already roaming America's streets, possibly preparing to knock at your door. What makes them so scream-out-loud horrifying is that they are the newly issued spawn of -- shriek!-- Wall Street.
The very same greed-fueled bankers who brought us the disaster of 2008's financial crash have created another exotic financial horror to replace their securitized subprime-mortgage packages that exploded all over us.
Wall Street wizards have been down in their corporate basements working furtively to fabricate some new, get-rich-quick financial gimmick, and -- Holy Frankenstein! -- they've done it.
It's a scheme based on the mundane (but huge) life insurance market. Wall Street intends to tap into the $26 trillion-worth of life insurance policies that Americans hold, using a financial mechanism called "life settlements."
Often, the ill and elderly need cash for assisted living or myriad other reasons, and a small network of insurance brokers exists to offer them a sizeable pile of money in exchange for being named the beneficiary of the policy. A broker might pay $400,000 for a million-dollar policy.
Wall Streeters intend to turn these life settlements into a big boon for investment banks and super-rich speculators. First, they will take over the broker side of the business, setting up extensive networks of heavily advertised, life-settlement agencies across the country to entice sick and old folks into settlements. You can imagine the come-ons: "Free Cash!" "Cash-in BEFORE You Die!" "You CAN Cheat Death!"
Next, Wall Street banks will "securitize" these settlements -- i.e., they will package thousands of them into bonds that they'll then sell (for hefty fees) to big investors around the globe. As a result, when Uncle Bob croaks in Dubuque, some speculator in Dubai will collect Bob's life insurance payout.
Drooling bankers anticipate a $500 billion market for this hustle. Even as Washington discusses ways to regulate Wall Street's earlier frenzied securitization lunacy, the giant banks are working themselves into this next frenzy.
As one giddily exclaimed, "We're hoping to get a herd stampeding."
The New York Times reports that Credit Suisse is already shouting yippy-ti-yi-yo, "building a financial assembly line to buy large numbers of life insurance policies, package and resell them -- just as Wall Street did with subprime securities." Similarly, reports the Times, "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."
While this game of grave-robbing for fun and profit is exhilarating for the investing elite, it will be a downer for life insurance customers, for it means that the price of policies will go up. This is because insurance companies base their price on the actuarial calculation that numerous policyholders will pay premiums for years, but then cancel their policies before they die (due to personal financial reasons, family breakups, etc.). In these cases, the insurers collect a wealth of premiums without having to pay out a dime.
But this calculation is to be wrecked by Wall Street's intrusion into the once-straightforward relationship between insurer and insured. Now, some faraway, third-party investor will own the policy, keeping it in force until the former policyholder dies. Thus, the company will make more payouts than it figured to, compelling them to recalculate their balance sheets -- and jack up life insurance prices.
Once again, Wall Street is turning a pedestrian consumer product into a global casino game. Consumers lose, while speculators gain from exploiting other people's hardships, eventually reaping profits from their deaths.
Why should we go along with this real-life Halloween horror? As suggested by Forbes magazine columnist Michael Maiello, Congress could and should implement a simple reform stating that there's no payout on any life insurance policy that is "transferred into an investable security."
This would still allow life settlements for the relatively few people who actually need them -- but it would drive a stake in the cold hearts of Wall Street profiteers. What a happy Halloween that would be!
