I really thought Wall Street was all about making as much money as possible. That's only half the story. There's another part I had overlooked. Those folks are out of their minds....truly insane. How else can we explain the latest effort to create "death bonds" by bundling life insurance policies into securities?
This one is a doozy. Hold on to your minds. It starts with finding old, sick people who are about to croak. Wall Street has decided to help these poor souls by giving of them cash for their life insurance policies. You're dying of cancer and have a million dollar policy? We'll give you $400,000 right now so you can enjoy your last few months on chemo. Think of your loved ones! You can give them a few bucks right now while you still are breathing, assuming they already haven't abandoned you. Or you can pay off your nursing home debts. Besides, you might be too sick to make your payments, thereby wrecking your policy anyway.
There are lots of sick folks who might want the cash, and Wall Street is ready to cash in. It will buy up these insurance policies, bundle them into giant pools and then sell pieces off to investors who will get the difference between what is paid for the policies and what the payout is after the person croaks. And yes, the sooner you die, the better the return.
Of course, the big money will go to the banks and investment houses that put this dark matter together, sell it, and then trade it. You're talking lots of fat fees every step of the way. And of course, there certainly will be credit default swap versions so that you can insure yourself against the insurance you are buying up. (If you'd like to know more about how this junk works ... and doesn't work, please see The Looting of America.)
At this point in human history, we have earned the right to ask whether or not this process is socially useful, especially since the entire financial sector sits upon trillions of dollars of taxpayer bailouts in the form of loans and asset guarantees. In a very real way, we, the taxpayers, are underwriting this new death bond industry. So the question we must ask is: What value does this insane process produce?
Unfortunately, Jenny Anderson, the NYT reporter who did such an excellent job breaking this story, found it necessary to repeat the usual drivel that justifies Wall Street's efforts. She writes, "Financial innovation can be good, of course, by lowering the cost of borrowing for everyone, giving consumers more investment choices and, more broadly by helping the economy to grow."
You've got to be kidding! There's no way to prove any of these claims are socially useful. That's because that's not what the game is about. It's about making money and we should be asking from the git-go, what makes this profitable for Wall Street and the death bond investors? Did our genius financial engineers find some little inefficiency in capital markets that will be corrected for the common good through this process? Will more insurance money be available at a cheaper cost? Nope, none of the above.
The insurance industry, however, thinks it knows the answer. The profits will come out of its hide. At the moment, the insurance industry banks on some number of sick people letting their policies lapse before they die. This greatly reduces or eliminates the value of the policy even though the sick person may have paid premiums for years. These lapses are built into the pricing of life insurance. If Wall Street has its way, those policies won't lapse and insurance profits will be squeezed. And of course, that in turn means that premiums on all of us will rise. So where do Wall Street profits come from? It's just a transfer from the insurance industry and from the consumer to Wall Street and its investors. Nothing of value at all will be created. Nothing new will be added to the economy. In the loony bin, this is what passes for innovation.
But why would any sane investor buy these death bonds? First of all, the returns will be higher than equivalent bonds, we can be sure of that. Second, there's little risk because everyone knows that the banks who will package this junk -- Goldman Sachs, JP Morgan Chase, etc -- are too big to fail. So the government and all of us, in effect, will underwrite this market.
However, the real question is, how could investors have so much money sloshing around?
This takes us back to the fundamental demand for the fantasy finance casino. Wall Street only creates this junk if they think they can profit off of it. And they can profit off of it because we have created a fabulously wealthy, but very small, investment class that has too much money and isn't content with pedestrian yields. They have too much money because of our ridiculous tax system which allows money to flow to the richest among us. In a saner time, like the 1950s, that money would have been taxed into the public coffers. Today it's sloshing around waiting to buy up death bonds.
Will death bond securitizations turn into another subprime fiasco? You never know. If some miracle drug comes along that cures cancer or heart disease, these bonds could crash just like those built on the housing boom. Then we could enjoy the spectacle of bailing out banks that went belly up because people lived longer. (To prevent such a financial disaster we may yet see Sarah Palin's death panels sponsored by Wall Street investors to counsel grandma to pull the plug as soon as possible.)
To be sure, we will see the rise of shyster insurance bundlers -- the death bond version of yesterday's NINJA ("no income, no job") mortgage dealers -- who will hang out at the chemo wards trying to package insurance policies to sell off to Wall Street. We already have such low-lifes under investigation by the New York AG's office. Hard to imagine an uglier business model.
Perhaps the most insane feature of the entire operation is that while the insurance industry is highly regulated, the death bond business is still a wonder of "financial innovation" and therefore free from government interference. God forbid we should retard such creativity. We sure don't want to fall behind other nations in the race to profit from misery!
Will Team Obama have the gumption to reign in this madness? Or will it again try to placate wealthy investors and banks? Given that they've failed to put a stop to Andrew Hall's $100 million payout from CitiGroup (a bank on taxpayer welfare) and given that they've let Goldman Sachs run up record profits (based on AIG payments that came directly from us), it's hard to be optimistic.
But think of the bright side. With financial insanity running wild, the administration might have a stronger case for health care reform. We will need the public option to provide more mental health coverage for us all.
Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It, Chelsea Green Publishing, June 2009.