Capitalism: A Love Story… right.

Greed

Wall Street’s newest attempt to capitalize on the poor and undereducated is to buy life settlement life insurance plans back from the policyholder(s). After which, they will securitize them into bonds that will be traded like pension funds. The funds generate profit when the former policyholder dies and the policy is paid out – not to mention, the earlier the policyholder dies, the bigger the return.

These exotic options come with an obvious risk – if people live longer than expected, then the fund will lose money. Rest easy, we needn’t worry about the firms, they will still turn a profit by pocketing the sizable fees that are associated with creating, reselling and subsequently trading these bonds.

Goldman Sachs and Credit Suisse have already created these so-called death indices that are traded similar to tradable stock market indices that allow investors to bet on the overall direction of a market without actually buying stocks.

Why?

Why would people be selling their life insurance in the first place, you ask? Some people whom are strapped for cash may sell their policy for a portion of the face value. Other’s simply let policies laps because they no longer have dependants that would require the extra money in the event of their death. Therefore, the insurance companies no longer need to pay out after the former policyholder’s death.

Profit!

This is where Wall Street comes in; they want to capitalize on the $26 trillion of life insurance policies in the US. Rather than letting policies laps, you can sell it to a firm for x amount and then the firm assumes the responsibility of the premiums. Then, upon the former policyholder’s death, the firm collects the policy payout. Same thing goes for those whom are selling them for cash infusions. Sounds innocent, right?

Hardly.

“What’s in a name? That which we call a rose by any other name would smell as sweet…”

This isn’t very different from the subprime scheme. There is no telling where the boundaries would be drawn as to how brokers secure these policies from people. I am sure they will impart the same predatory practices that they used to get people to buy into subprime loans.

This, on the surface, does not directly affect the original policyholder. But, because the insurance companies will have to payout on many more policies that which would have been defaulted — the insurance companies are losing profits. Losing profits means anything from raising premiums on new policies to laying off employees to compensate the difference. As this bubble grows on Wall Street and the policies get more and more expensive as the insurers try and recoup their losses; the bubble will lose stability. Eventually, people will start defaulting on their premiums or not taking out policies at all and with less capital coming in and more capital going out… you understand where I am going with this.

Pop.

These exotic investment options crumble, those uninitiated to Wall Street’s ways that bought into these funds have now been wiped out and we have a life settlement insurance meltdown. “Just as all mortgage providers have been tarred by subprime mortgages, so too is the concern that all life insurance companies would be tarred with the brush of subprime life insurance settlements,” said Michael Lovendusky, vice president and associate general counsel of the American Council of Life Insurers. No one can say when this meltdown will happen or what its impact will be, but it is inevitable.

I would like to believe that the industry will be able to find allies in government, but when Goldman Sachs runs our treasury department, the blocking of these potentially predatory practices is unlikely. We cannot allow greedy brokerage firms to create exotic, and therefore, very risky and unstable investment options that set the stage for meltdowns.

This bubble and burst system has to come to an end. Regulate Wall Street or we will have to endure these financial collapses every 8-15 years until kingdom come.

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  1. I don’t know If I said it already but …Hey good stuff…keep up the good work! 🙂 I read a lot of blogs on a daily basis and for the most part, people lack substance but, I just wanted to make a quick comment to say I’m glad I found your blog. Thanks,)

    A definite great read..Jim Bean

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