Are you ready for the latest craze in the Wall Street Casino? As the NY Times is reporting Wall Street Pursues Profits in Bundles of Life Insurance.
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.
Isn't it reassuring to know that our "best" and our "brightest" have calmed down after peering into the financial abyss a year ago. These people are truly national treasures considering the innovative ways they find to attract scarce capital for efficient allocation.
In the aftermath of the financial meltdown, exotic investments dreamed up by Wall Street got much of the blame. It was not just subprime mortgage securities but an array of products — credit-default swaps, structured investment vehicles, collateralized debt obligations — that proved far riskier than anticipated.
The debacle gave financial wizardry a bad name generally, but not on Wall Street. Even as Washington debates increased financial regulation, bankers are scurrying to concoct new products.
But of course, there is a bit more to it than saving reputations:
Undeterred, Wall Street is racing ahead for a simple reason: With $26 trillion of life insurance policies in force in the United States, the market could be huge.
How altruistic of them. Read the whole piece if you have the stomach for it.
However, if you are itching to run to your nearest casino to plop your chips down in this game, you should be aware that it is not a new idea! Indeed, the Germans have found that "Investing in Death" is more complicated and that Betting on US Life Expectancy Proves Risky.
When will this lunacy end?