Girl vs Robot: Dead Peasants
Before we get into the potential "next big thing" on Wall Street, let me just make one thing clear. I'm not saying Wall Street did not learn it's lesson from the financial meltdown of 2008. By all accounts they've learned it quite well. This time around they'll be structuring the securities so that they make the fees and set-up costs and the investors bear the risk. No more toxic assets. Problem solved. That was the problem with the financial crisis, right? It was that the investment firms lost money?
Not so this time around. Mortgages are bust, so they've been looking for the next big way to monetize risk. It's based around "life settlements." If you buy a life insurance policy, you might just be able to sell it. You get a portion of the money up front and the purchaser then pays the premiums until you die and they collect the payout. If you die early, they make a lot. If you live longer than expected, they might just lose their shirts.
This sort of scheme was tried with life/health insurance combos back when AIDS was tearing through the country, by the way. It made some opportunistic investors quite rich as many were willing to give up the payout of their life insurance so they could keep paying their medical bills and have even a tiny chance of living. That ride came to an end when advancements in AIDS treatment turned life expectancies of six months into ten or twenty years. There are still a few live policies out there (or were before the collapse, maybe the government owns them under TARP now.)
Even taking away the health insurance costs, this type of settlement is not as bullet-proof as it might seem. German banks have been trying their hands at buying up American life insurance for a few years now with mixed results. A few securities based on life settlements have made money, but many have failed to pay out dividends as Americans have been living longer than the security expected.
Don't tell that to Wall Street though. Major buzz is being built behind these policies. A considerable amount of blog talk has also jokingly wondered if wealthy investors might not start promoting death panels or holding back medical breakthroughs in order to increase the yield on their investments, but to me, the real danger lies in "dead peasant" policies.
It is legal for companies to take out life insurance policies on their workers with varying degrees of disclosure depending on the State in which it takes place. Often, the policy is then offered to the employee at a smaller premium and part of any payout is kept by the company. If the worker is laid off, their policy ends, but the company does not have to cancel their end of it, they can collect on a worker who no longer is employed. In many cases, the company does cancel the policy, but there have been examples of companies taking out policies on terminally ill employees under their collective pool (keeping premiums low on a policy that the individual would never be able to get) and then firing the employee.
That's bad enough, but here's something a bit more frightening. If this type of security becomes trendy, companies could have an incentive to purchase policies for all of their employees and then simply sell the policy off to a security upon termination, or perhaps even right away for a few quick hundred thousands whenever they have a new hire. These securities will then end up in the portfolios of pension funds, government agencies, educational trusts, etc, all of the usual places supposedly AAA-rated securities end up.
As long as people die out according to the statistical model and as long as no major actor suddenly goes insolvent for some other reason, things will be fine for awhile, but the longer that sort of thing goes on, the more systemic risk would accumulate in the system, just like last time.
But Wall Street will be leaving most or all of the risk directly on investors this time, and even if it does come back to bite them, they're now two or three times bigger than they were when the last collapse happened due to all of the mergers. They know they're "too big to fail" so they don't have to worry, the government will be forced to bail them out.
So fuck you taxpayers.
links: Back In Bidness- - -Banksters to bet trillions on decreased life expectancy with "securitized life insurance"- - -Betting on US Life Expectancy Proves Risky