Wall Street Gambles on Old People Dying
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. The index is similar to tradable stock market indices that allow investors to bet on the overall direction of the market without buying stocks.
Spokesmen for Credit Suisse and Goldman Sachs declined to comment.
via Back to Business – Wall Street Pursues Profit in Bundles of Life Insurance – Series – NYTimes.com.
I’m sort of surprised that this didn’t get more attention. It looks like Wall Street is developing a new use for the securitization process — bundling life insurance policies and selling them as bonds to investors who would be betting, in essence, on when the policyholders will die.
The mechanism here is basically the same as the one used for mortgage-backed securities. Wall Street buys up life policies from elderly or ill people, who sell them for up-front cash that can be enjoyed before actual death (similar to those brokered arrangements with terminally ill HIV patients that received so much attention in the late eighties). They then take those policies and dump them into a securitized pool, where they can then be packaged as bonds and sold to investors who would get paid off when the policyholders die.
The mechanism works exactly the same as it did for MBS; in both cases the bank issuing the bond receives regular income in exchange for a promise to pay a lump sum when there is a “reference event,” which with mortgages is a default, but in this case would mean death.
What’s very amusing about this New York Times article is that, while describing this, there is no passage that reads anything like, “This utterly insane plan, which will condemn all those involved with it to an eternity of elaborate torment in the afterlife, is ironically being promoted by the very institutions that only just recently tried to destroy the world by creating similar casino-like gambits based on home ownership.”
The article does discuss the probable negative consequence that will come with a severe drop in the number of lapsed policies (until now, there were always a certain number of people who would let their insurance lapse either because they outlived their beneficiaries or could no longer afford the premiums; now, they will simply sell their policies instead of letting them lapse). The likely result here is higher premiums across the board for the ordinary person, which I suppose is an important point to consider.
But even beyond that… what the fuck??? This feels like financial innovation as practiced by Josef Mengele meets the Zucker Brothers; not just evil, but wacky evil. I don’t even want to think about what happens when Goldman Sachs suddenly has a large financial stake in the premature deaths of a bunch of old people. Where are the crazy police? Where is the crack federal crazy squad with the big butterfly net? I don’t know about betting on anyone’s life expectancy, but I think I’d like to bet on whether or not this idea ends well.
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A few years back, my friend told me about how his sister was working in university financing. And the big thing they were doing was taking out life insurance policies on their alums, with the university as the beneficiary. They’d e-mail you a form, all you had to do was sign, and in the event of your unfortunate early expiration, your Swizzledick State would get to collect some thousands in your name. I got a few of these letters from my Big 10 university, and tore them up before tossing them in the recycling. Do you think this is one of the big sources that Wall Street is buying up?
Most probably. This probably explains why the Blackstone Group sometime ago began purchasing extended stay facilities, private prisons and insurance funds. (Although they may have purchased the privatized prisons also for their potential for brainwashed and retrained psycho-assassins.)
Buy insurance stocks…..
In response to another comment. See in context »I’m justing waiting for the day a Wall Street big wigs decides these old people are living too long and hires some Blackwater thugs to correct the situation.
I have found that much of the bat shit crazy stuff playing in these United States these days makes more sense if one simply throws the whole “freedom and liberty” thing away as fetishes from days gone buy, and instead adopts a “serfs and masters” model.
[...] Matt Taibbi discusses Wall Street’s latest mind-blowing [...]
This really isn’t new, they used to call it a tontine – everybody throws in a wad of cash and the last one alive spends it. Wall Street seems to think they will live forever.
I immediately started thinking of a TV show about a squad of corporate subcontractors who started out “cashing in” insureds who has outlasted their projected lifespan, but eventually just started killing anyone after they had signed off on the payout (to maximize earnings). Of course I quickly realized it was just an actuarial version of Soylent Green.
Maria Bartiromo probably thinks this is a great idea. Some of the profits from this will probably go towards sponsoring her a new show financed by her boyfriend/live in who gets all the blood money.
Business as usual at Fox Light, err I mean CNBC.
[...] Not surprisingly, the New York Times’ article about the creation of life settlement securities has caused a bit of an uproar within the community of people who can read boring articles about financial arcana and muster a sense of outrage (Naked Capitalism, for one. As her post title suggests, Yves Smith is seemingly not so bothered about the same issues as Taibbi, predictably, is outraged about). [...]
I’m forced to imagine some automated trading algorithm over at Credit Suisse squeezing every single available penny in trading after the next blip in American life expentancy. Some eager young actuarial suit running the probability numbers on the next Big One in San Francisco and figuring out in advance the perfect trading strategy on that day when there’s a momentary 9 day change in average life expectancy spread out across all of America. Figuring out the geographic spread for different securities to instantly react to a terrorist attack in D.C. or a hurricane in Texas. A high-powered Jimmy the Greek with no honor, soaked in blood.
Lord. Talk about your basic, evil carpetbagging. Hardened capitalists are going to scrub themselves like rape victims after they find out this is going on in the name of their deified philosophy.
Wow – disgusting. Either GS has set the bar lower or I’m so naive as to still believe they have a [decency] bar.
Then again, those smarty-pants sure have a knack for finding ways to make money! How can I jump on this vomit-gravy train?
And, see, here’s where Mr. Taibbi’s (incredible) Rolling Stone expose on GS suddenly comes up short, in retrospect: even he failed to predict that the Next Big Thing for the “great American bubble machine” would be the gambling on HUMAN LIFE EXPECTANCY.
And yet, I’m not surprised….
Patrick Bateman still works on Wall Street?
So the health insurance side of the house can deny treatment so that the life insurance side of the house can cash in. Hmm.
Dantean punishment? Being pierced and eviscerated by barbed iron digits while restrained by an analemma-shaped serpent.
And, the real moneymaker in this one will be that they can revive trading in credit default swaps, so everyone that buys the “bonds” thinks they’re getting protection just in case someone suddenly pops up with a cure for cancer (which Wall Street would damned sure want a cut of, too) or Ponce de Leon’s first cousin thirty-six times removed finally discovers the Fountain of Youth. Then all those other banks and hedge funds want in on that action, too… just like the last time around.
Oh, yeah, banks are the prudent distributors of investment capital. There’s a notion that went the way of the poodle skirt and saddle shoes….
How would this jive with Ray Kurzweil and his prognostications? He believes humans will be able to live forever in the near future.
Hey, but we did need a new economic engine. Why shouldn’t it be our own mortality? Oh, because Soylent Green is people.
I’m curious, Nick. Have you actually read any Kurzweil?
In response to another comment. See in context »Jack,
http://www.fantastic-voyage.net/index.html
Yes.
In response to another comment. See in context »Death is natural to human life. In the western world we are irritated by it, because we take our life so seriously. But not everything is evil, because it has to do with death. There are a lot of people who profit from someone’s death, like coffin builders, and what they do is not considered immoral.
So buying up life insurances is not per se a bad thing. If you had a life insurance and you couldn’t pay the premiums, or you didn’t want to any longer, the only thing you could do was give it back to the insurance company for a very bad price. For an individual it’s better to sell the insurance to someone else, instead of giving it back to the insurance company.
Now with less people giving back their insurances, and more selling them, the premiums might go up. But I don’t see, why the other customers have a right for things to stay as they were on the expense of those that need to get out of their policy. You call them “the ordinary people”, but I, wanting out of my policy, am just as ordinary as they are. Until recently the system was hugely disadvantegous for a certain group of ordinaries. Furthermore life insurance companies can adjust to the new environment, maybe even adjust for the better, with regards to their clients, the humans.
The real problem is, as Goldman Sachs becomes a middle man, a market is created. And markets attract speculators, and all speculators want their cut. The problems of trading life insurances are then the same as the problems the world has with any other form of paper trading.
But condemning it all right away on moral grounds is pharisee style.
Soylent Green had the classic Charleton Heston moment of astonished outrage as also seen in Planet of the Apes and Omega Man. (Great cinema, great actor… remember the blown up statue of Liberty on the beach) However, compared to what is going on now, Soylent Green is far more humane. What will these people do to make a few more million? What new FIME will they create? What new big pile of money will these money sponges exploit? Oh, just in case you were wondering, “FIME” is an acronym I thought of a few weeks ago, please feel free to use it; Financial Instruments of Mass Extortion.
I read this morning that even Lloyd Blankfein thinks that anger over bankers’ pay was “understandable and appropriate”. Now I am more confused. Does this mean he will stand still as we stick our pitch forks in him?
[...] Matt Taibi: Wall Street Gambles on Old People Dying [...]
This pisses me off. I was recently laid off from this company which does all sorts of cost-savings stuff, like no vacation on the books, etc. Publicly traded company, a big player in the tech world and contractor with Dept of Defense on cybersecurity.
I never had time to enroll in the 401k plan, but going through my paperwork I discover I have a few days to “convert” the life insurance I bought through them. WTH? I have no children, how on earth was I enrolled in life insurance? Oh, and on top of all this, while they made me sign a release promising not to sue them for wrongful termination so I could get a severance package, they’re contesting my unemployment!
But seriously, that they enroll me automatically in life insurance I have no dependents. I bet if I don’t convert the life insurance in time, the company keeps the money and splits it with Goldman Sachs.
This is an argument for bringing back religion – so these people can fear the afterlife.
“It hath been found by experience, that the making of insurances, interest or no interest, or without further proof of interest than the policy, hath been productive of many pernicious practices, whereby great numbers of ships, with their cargoes, have been fraudulently lost or destroyed.”
- Preamble to Marine Insurance Act 1745
This act would be strengthened in 1909 to make it a crime to take out such a policy in Great Britain. The US has similar laws. All of this was prompted by the very real fear that moral hazard would create so much chaos that the marine insurance market would shut down, trade by ship would become uninsurable, and shipping itself would slow. Indeed liquid markets for speculative insurance on people’s lives had led to murders and other macabre acts such that France, Holland and Sweden actually banned life insurance altogether in the 16th and 17th centuries.
Apparently we’ve learned little from history. Sounds a little like naked credit derivatives to my ears.
Incidentally, the NYAG under Spitzer (of course) sued the largest life settlement broker, Coventry, for all sorts of nefarious nonsense including bid-rigging and other games to rip off policyholders.
Mr. Taibbi,
I think you might have missed a nuance here. These are not ordinary people who are making Goldman Sachs the beneficiary of their life insurance in exchange for cash (for maybe four bits on the dollar?). These are people who are very ill and have a very short life expectancy. They need money for expensive medical treatments or other end of life expenses and their life insurance is one items that they can turn into cash. It is actually even more ghoulish than you make it out to be, particularly in light of the current health care reform debate, but financially, a more secure investment. These are not people who are going to hanging around for another 20 years. If the proposed health care reform bill were to pass, this whole area of investment would dry up. I guess that the financial stability of Wall Street really is dependent upon the defeat of Mr. Obama’s health care reform effort.
When blogging/talking about this latest scheme, I suggest the descriptor “Death Derivatives” be widely used. Let it go viral to shame these motherfuckers.
Talk about “death panels!” Who wants to kill your grandma now?
[...] Link: Matt Taibbi – Taibblog – Wall Street Gambles on Old People Dying – True/Slant [...]
Davidlosangeles, depending on their contract all sorts of people, they don’t have to be ill, can decide to sell off their life insurance policy. Their reasons to sell can by anything from not being able to afford the monthly premium any longer to paying for their childrens college tuition.
It’s not so black and white as some people here paint it. It all starts with the life insurance company itself probably being a fuck up, talking people into bad life insurance policies…
Hello Jonkarlo,
It is certainly true that people who basically sell their life insurance to a company like AIG do not have to be ill but why would anyone buy a life insurance policy from someone who was not going to die fairly soon. The profits increase as the life-span of the insured decreases. Let us say that I have a term life insurance policy with 10 years remaining with a face value of 1,000,000 USD and a monthly premium of 1,000 USD per month. I make AIG the beneficiary and receive 500,000 USD as a lump sum payment. AIG has to make 120,000 USD in payments over the remaining term of the policy, if I do not die in the next ten years. If I die in one year, they make 12,000 USD in payments, the difference is 100,000 USD. Perhaps more to the point, AIG loses everything if I don’t die in the next ten years when the term expires. Even if I do die at say nine years, they will have had to pay out over 100,000 USD in prermiums and have no income from their “investment” for nine years. AIG would be crazy to buy my policy, if they did not expect me to die in some fairly short (i.e. profitable) period of time. Obviously there are all sorts of different variations with whole life vs. term life, how much is paid up front, &c. However, the point is clear, the best returns from AIG’s point of view are policies whose owners are not expected to live very long.
In response to another comment. See in context »Yes, but that just means, the sooner you are expected to die, the more your policy is worth.
There is also a scenario, where AIG pays you $150k upfront, so they can wait more than 60 years till you die, still making a profit.
If you buy policies from men with the age of 65, and their life expectancy is on avarage 83 years, they don’t need to have terminal illnesses, you wait roughly 17 years and calculate the price accordingly.
The price you can offer those people is probably still better then what their insurance companies would have offered them. Because the companies could exercise “take it or leave it” power over them.
I just think there is no use in engaging in a moral debate about life insurance trading, when in reality it is just as bad as any other trading, and when furthermore the focus of the discussion should be on the Financial Industry and their actual crimes.
In response to another comment. See in context »Depraved and indifferent.
Herewith, a paraphrase of a lapidary remark capturing the mindset of an old-school bankster– written when civilization had not yet entirely devolved into the present technobarbarism from which Matt and I appropriately recoil:
If they had like to die, they had better do it, and increase the surplus profits.
[...] Matt Taibbi – Taibblog – Wall Street Gambles on Old People Dying – True/Slant Corporate Greed knows few boundaries (tags: health deathofamerica greed) [...]
Brings a whole new meaning to the phrase “Short Life.”
[...] ENDLESS control over the public discourse might be cause for concern, here is the latest post from Matt Taibbi, telling us how “wacky evil” Goldman Sachs has become. “It looks like Wall Street [...]
About 10 years ago, I worked as an analyst for an office of life insurance agents that specialized in servicing high net worth clients and selling small companies policies on their executives using life insurance as funding options for tax deferred savings. The proceeds from the death of the execs would go to fund the retirement benefits of other execs and cash value of the policies can also be withdrawn or loaned out. I also did some analysis and policy projections for a few life settlement deals. This isn’t anything new except that now they are securitizing this stuff and selling them as bonds. The problem here is also that the cash flows are hard to determine for pools of policies where the average age of insureds are 50 so I guess if life expectancy is 75 this could be a 25 year bond. However, most life insurance carriers have the right to increase fees or lower the crediting interest rate on the cash value which would demand higher premiums to keep the policy in force (from lapsing) and also you have to factor in the credit risk of the life insurance carrier. I am sure the bonds sold on this are assumed to have low credit risk because no one lives forever so investors assume that the only risk is that the insureds live longer than expected but credit risk again is systemic in the sense that if life insurance carrier fail, these bonds are worthless. Also, the policy owners who are usually paid a lumpsum to sell the policies are paid less than what the beneficiaries would recieve on a present value basis so usually the investors buy the policies at a discount. Therefore, Goldman or whoever is selling this crap is again making money by structuring the deals then dumping the crap to investors.
I also meant that the risk due to lapsing increases as life insurance carriers get into trouble because they tend to raise policy fees or lower crediting rates. Therefore policy laspsing risk increases as insurance carriers get into trouble and also the death benefit payment is also at risk. The winners of this are the ones who stucture the deal and sell the bonds.
In response to another comment. See in context »One of the people interviewed (analyst type) claims it is an uncorrelated situation, that is, people’s life insurance policies, or their longevity, is uncorrelated to the ups and downs of the stock market!
But wait, there is indeed a correlation as studies have demonstrated people tend to be healthier — and live longer — during recessions and economically depressed eras (with that very small demographic of suicides, but isn’t that still exempt from insurance payouts?).
Therefore, this is indeed a correlated asset. This uncorrelated argument was used ad infinitum to back every single derivatives and swap securitization.
Also, wasn’t DBRS the group who gave the high applause to the Constant Proportion Debt Obligation? That really brought down everything when those were spun down…..
I was working at a newspaper in a very small Caribbean country in 2004 when I got a press release announcing a press conference from a developer who wanted to build a huge project–a billion dollars worth of villas, hotels, facilities. The press conference was to be on the Friday and a church service the Sunday held by two priests from this rather strangely named church. Which sounded weird. So I spent the week reading up on the church. It had loose relations with various charities; one sent people to Russia after the collapse and had somehow already established some kind of evangelical college over there. Then there was the outfit that came to look at this possible island investment. This group, a product of the Bush faith-based initiatives, ministered to the very ill and the very old and somehow along the way also convinced them to cash in their insurance policies. The priests (two of them came to the press conference, wearing dogcollars) would then sell these to brokers for a flat fee. But this charity also then turned around and invested the money in shares of some sort of Jesus-themed investment trust and it was this investment trust that was considering the island project. Those priests were the two creepiest human beings I ever laid eyes on. I sort of fired questions at them until they laid out the whole way these deals worked. Afterwards I found myself being grilled by one of them in a way that got the hair standing up on the back of my neck–friendly but very pointed, not to say menacing. That was the one who also said, from the podium, that I looked really cute holding a mike up to my mouth. Nothing more was heard of them after that press conference and the developer (an American) left the island within the year. Oh and I also learned that at the time viatical settlements were the least regulated securities, susceptible to fraud at just about every step of the transaction, a nearly guaranteed money-loser for investors.
I’m waiting for Death Deafault Swaps. Or Death Defiance Swaps. People can bet against the securities if the person doesn’t die. Then they’ll start buying up pools of insurance policies sold by insurance companies on 20 Year olds. If death doesn’t occur in three years , the swap has to be paid off to the full value of the security. Of course each security will have a pool of million dollar policies where each person has had a complete genetic and physical check up. The insured , in exchange for 10 Grand has to agree not to joing the military or any other dngereous job , go out at night , have sex with untested partners and variety of other life assurances.
Then they’ll combine a 1000 of them for a one security that will be sold as a billion dollar face value, find some dip shit to buy them, find some dip shits like AIG to sell the swaps.
It will be the inverse of the Credit default swaps where a mortage could be had if a person could fog a mirror. This time they’ll be tested like crazy. Then they put tiny tranches of dying people with young and healthy people and get them rated as DIAAA (death imminent-absolutely assured accuracy) with a annualized return of 14%.
Banks will buy them with fed money to cover their lifeless non performing mortgage assets and get burned again because they are dumber than fuck.
We won’t have to bail them becuase this time the super computer that prints electronic money will have a catastrophic meltdown and the Fed won’t be able to help. So what shoulda happened last year should happen within two years. In the mean time, these fuckers will get rich as hell again.
We all will get fucked. Don’t listen to people who say there is anything redeeming about this. Life insurance prices will go sky high as actuaries reprice policies to reflect the fact that they won’t be dropped. Meanwhile the value of the death securities will drop to 1% of par as they see virtually no one is dying.
The PR people did their jobs. Now comes the scam.
Doesn’t surprise me. Nobody’s telling the Emperor he has no clothes, because they all want to be so much like him. “Hey honey, should we get the 46″ or 52″ plasma for the crapper. I saw Ludacris has 60″ on Cribs.” People are gross.
http://welcomebacktopottersville.blogspot.com/2009/09/big-casino.html
I’m glad you’re writing about this, Matt. You’ve always been one of my heroes and you’ve just given me another reason why I still consider you one.
Well, wait what you see what they’ve got planned next: speculative trading in organ derivatives, per McMegan McArdle’s Randian utopian musings about “why not?” legalize the sale of body parts a few months back.
Perhaps organ derivatives can supply the next speculative bubble needed to get this economy moving again. Like the last one, we can game the poor and middle classes to get this bitch rolling, and when we’ve all traded 100 billion kidneys back and forth and so on, we’ll discover that there are actually only about 14 billion kidneys in real terms – and you don’t even wanna know what this bailout is gonna look like, though I suspect it will go something like this.
I’ve seen first hand how some of this stuff is priced. It’s definitely a disaster waiting to happen. I can give you dozens of specific assumptions that are being made here on mortality that are unlikely to pan out. For example mortality rates for elderly people have been consistently improving over time. This is assumed not to happen going forward. Also the companies that are involved in making life expectancy assessments have a financial incentive to shorten these to get deals done. Unless there is some major pandemic, these things are definitely going to blow up.
Just a thought…
We now know that GS has a very active lobby for issues that impact their bottom line. What happens when they lobby for disincentives for medical innovation? Worse yet, do they begin to actively stir up sentiment for a war? And when do they pair up with organized crime and begin actively killing people?
Not saying that will happen, but this is a verrrrry slippery slope here.
Marketing life settlements is a shady business. Check it:
http://www.sfreporter.com/stories/die_already/5177/
Echoes of the subprime bubble.