Friday, September 11, 2009

Wall Street plays with death

Matt Taibbi has an interesting post up about a new racket on Wall Street: a tradable index on life settlements. Just what is this you wonder? It's a bright idea by the same folks that brought you the wonderfully catastrophic world of Mortgage Backed Securities. You remember them from the wonderful economic crisis we're trying to dig ourselves out of.

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.

Taibbi points out two major problems with this latest casino game:

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

I wonder if Sarah Palin and the rest of the GOP is gonna go after Wall Street on this. I mean...these are the same folks that tell us how wonderful greed is. What a strong motivating and powerful tool it is, right? it that far of a jump to think that the Gordon Gekkos of the world could start putting together wet teams?


hpnpilot said...

You guys are missing the point. For starters, securitization of Mortgage-Backed Securities is NOT what caused the crisis. Securitization is actually good FOR the mortgagees that meet the appropriate qualifications. What caused the crisis was the insane leverage by the Street of these securities, the relaxation of lending requirements by Fannie and Freddie, the fraudulent, unregulated activities of the sleaze ball mortgage brokers, the greedy ratings agencies and the blatant lack of monitoring of these mortgage creations by alan Greenspan's Fed. As far as Life Settlements, it's a good thing for the consumer to be able to sell his insurance policy. It's another asset that helped him during the crisis (not to meantion the poor Madoff victims). This privilege was passed by Congress 90 years ago. Think of AIDs victims who can enjoy the last couple of years of their life by getting cash out of their policy, often multiples of what the insurance carrier would give them as surrender value. And lastly, this is a TINY market compared to the MBS market. Very minor. Ask Warren Buffet, a major buyer of policies.

pluvlaw said...

You make solid points. But my concern with the whole MBS scandal was the utter unscupulous actions by the folks in the bond departments who knew it was all a shell game. You're absolutely the ratings agencies had a huge role for banking so much money on crap that they did not even understand was crap. It just scares the hell out of me that both those guys and the Street were already diving right back into the bundling game shortly after the first of the year. I guess I just don't trust them. Hell...even Buffet got taken for a ride on MBS, as Moodys thought their ratings were accurate up until the end.

I don't pretend to know a lot about finance. Hell...I can't manage my own worth a damn. But it scares me that either a lot of folks in that business don't understand this shit or they do and they just let it happen.

I did a post back in November when I came across a good article by Michael Lewis and to be candid, it was the best explanation I have come across for what happened. But I had read Liar's Poker was back around 2000 or so and I will never forget the utter fear Lewis conveyed about how he just knew one day he would be exposed. It's like a wild lightning ride that too many seem to not care to really understand.

Having said all that, I'll candidly admit that I was really just wanting to poke the death panelers a little.