Wall Street Greed Life Insurance Settlement Bonds

Life settlements are a way to sell a whole life insurance policy to a third party, in return for cash that is in excess of cash value that you would ordinarily receive from the insurance company if you cashed out. When you die, having sold to a life settlement company, the third party investor with the life settlement company cashes in. Wall Street, who bundled mortgages to create the disaster of the financial meltdown, now wants to bundle these life settlements, and sell the bonds to investors.

While, on the surface this looks like a legitimate endeavor for investment banks on Wall Street to securitize, the problem is that there already is a need on the part of life settlement companies to gain access to a person's medical records, to inquire about the health of the person who sold his life insurance to the life settlement company. That would be an infringement to privacy. It is likely that the investors will have access to that health information as well as the life settlement companies.

More importantly, this will likely raise premiums. As more people take advantage of life settlements and do not let their policies that they don't need lapse, there will be more payouts required by the insurance companies. They will have to pay out and the result will be that they will have to charge more.

Update: Wall Street Life Settlements Are Back!

While Goldman Sachs has pulled out of the Life Settlement business, a company called Life Partners Holdings out of Texas is quietly buying up life insurance policies, and slicing them up into bonds just like bad mortgage loans were packaged up and sold to investors. As it turns out, many of the people the company is betting on to die within a certain amount of time are living twice or three times as long as the company has indicated. One investor was annoyed, and you wonder if she was annoyed at the person for not dying in a timely manner or if she is annoyed at the Life Partners organization.

Regardless, this is really a disgusting business when you think about it. Legal to be sure, but it is very disgusting, betting on when a person dies. Too bad the insurance companies would not just pay a reasonable cash settlement if a person has paid on his policy for a lifetime.

Update: Life Settlements on Hold by Goldman Sachs.

Goldman saw less interest in their mortality index and life settlements market so they exited the market, for now. While the CDO bonds for life settlements are on hold, Goldman owns two firms that purchase the settlements on a stand alone basis. So in the future this bond business may be unfortunately revisited.

Link: A Renewal of Life Settlements on Greedy Wall Street

Perhaps the greatest theoretical danger to life settlements is the concept of insurable interest. The concept basically is the understanding that if a third party stands to collect they have a motive to murder the insured! The securitization of these products may diminish this danger, however if a bunch of folks lived longer than the investors would be told is likely to happen, the fees paid by these investors could be much more than originally bargained for. This morbid Wall Street game would be to wage war on the insurance companies, and premiums would no doubt escalate.

The risk to investors in having to pay the recurring fees on the policies in addition to the initial settlements to the insured makes this game a very big gamble. While an individual investor may be able to monitor his risk, it is unlikely that those buying securitized bonds would be able to adequately monitor their risks.

Without the ability to monitor risk, would there be shoddy underwriting of policies? Could there be some gaming of the system, causing the entire market for these investments to dry up as mortgage backed securities and CDO's have dried up? No one knows.

I suppose that, while not likely, it is possible for insurance companies to collude with the investment banks. In return for kickbacks, and the ability to raise insurance rates across the board, insurance companies could write policies to folks who are in ill health. They could have doctors lie about medical conditions. This would allow the Life Settlements scam to manifest to great financial benefit to the investment banks. It could give insurance companies the ability to radically raise insurance rates and make more money for themselves. Again, I don't know if this could be hidden from regulators, but liar loans were hidden. People could state whatever income they chose to get a toxic loan. So it seems logical that the same game could be played with insurance, to the detriment of all but the investment banks and insurance companies.

The issue I have is not with the concept of a life settlement. Private companies buy those in an effort to make money but also it provides a service to some with financial issues and chronic disease. The issue I have is with the securitization of viatical settlements. The securitization can raise insurance rates as I just explained, and it can cause a morbid betting among investors in what amounts to a feeding frenzy. And yet, many times the investors are left holding the bag as the insured ends up outliving the profits on the policies. The company setting up the securitization has the upper hand and stands to profit the most. As in the housing bubble, this profiteering should be illegal. I would like to see life settlements continue, but the securitization of these viatical settlements banned permanently.

The greatest danger for investors in this high stakes game is to overpay for the settlements. If each settlement is valued based upon the health of the insured, with the settlements for the ones in poorest health being the most valuable, investors could be both deceived and or lied to as to the value of the settlements.

Certainly it would not be above Wall Street to lie to investors as they did with mortgaged backed securities. Heck, they may even be able to coax the ratings agencies like Moodys and Standard and Poors and Fitch to highly rate these settlements, giving investors a false sense of assurance as to the cost versus the rewards of the bonds. I am not saying that the ratings agencies will go along. We will have to see. Meanwhile, investors beware, as the casino called Wall Street is open for business and is exploring every potentially shady deal it can make a big return on.

Securitization of life settlements into Collateralized Death Obligations would be morbid enough. But what if bankers wanted to make fees off the swaps? Swaps are a bet on which way a bond will go, whether it will default or not. Since it is unlikely that these bonds would default, the bet could be on how soon the fellow will die. I realize that is an unlikely scenario, but I put little trust in Wall Street. Truth is, you can bet on just about anything with a swap!  

Thanks Phil Gramm for giving us legalized gambling with swaps, that now may be used to bet on the timeliness of death! What a great American and Texan you are!