On the front page of the NY Times today is the story that the Big Financial Wizards, whom the American public has just bailed out to the tune of Trillions, sees their next Big Financial Innovation in betting on Americans to die.
That's right, they want to create pools of risk by packaging tranches (sound familiar?) of life insurance policies. They buy life insurance policies from elderly people who need money, and then resell them to "investors." These investors then get paid when the underlying people die! Sweet!
Why are they doing this? Well, because they can't make as many lucrative bets on the mortage industry anymore. So they'll looking for new ways to profit at the expense of the American people (lending money to American businesses, large and small, is just so 1950s).
The Times article doesn't nearly do enough to describe what a F--ED UP IDEA this is, so I will. Here's what the article does say:
But the industry has been plagued by fraud complaints. State insurance regulators, hamstrung by a patchwork of laws and regulations, have criticized life settlement brokers for coercing the ill and elderly to take out policies with the sole purpose of selling them back to the brokers, called “stranger-owned life insurance."
...
In addition to fraud, there is another potential risk for investors: that some people could live far longer than expected.
It is not just a hypothetical risk. That is what happened in the 1980s, when new treatments prolonged the life of AIDS patients. Investors who bought their policies on the expectation that the most victims would die within two years ended up losing money.
...
But even with a math whiz calculating every possibility, some risks may not be apparent until after the fact. How can a computer accurately predict what would happen if health reform passed, for example, and better care for a large number of Americans meant that people generally started living longer? Or if a magic-bullet cure for all types of cancer was developed?
If the computer models were wrong, investors could lose a lot of money.
Oh, it would be such a sad risk if people lived longer. Or if treatments and cures for fatal diseases were to be found. Those poor investment banks.
Do you think such powerful corporate behemoths, who have the ears of every top politician in power, might lobby to cut funding for disease cures, or to block increases in health care? Nah. That would just be too cynical. It's not like a corporation would ever want people to go without the best in medical care in order to increase their profits. Would they?
These are the Smartest People In The Room who brought you the housing collapse, with a very similar collateralized product. What kind of collapse would be a result of this particular Financial Wizardry Boom?
We can easily understand the motives of the investment banks. They are infinitely greedy, and don't have a whiff of that pesky "morality" thing to give them pause. But what about the suppliers of this product... the elderly people who currently own the life insurance policies on their own lives (what an quaint idea!)
From across the Pond, The Economist gives us the background:
More recently, the credit crisis has battered the savings of elderly Americans, leaving their life-insurance policies as one of their more valuable assets. Seduced by advertisements, they can sell it to a life- settlement firm for many times the amount they would get if they cashed it in with the insurer. The buyer takes over payment of the premiums in return for the payout when the policyholder dies.
So... the investment banks create a major credit crisis recession by packaging and securitizing mortgage products. As a result of that crisis, normal people suffer and are forced to sell their one remaining asset -- their healthy life -- to the investment banks, so that the investment banks can package and securitize it. It would be creepy science fiction if it weren't true.
The low quality of health care in this country increases the value of these products because people will die sooner here with low quality health care. Even worse, the crushing and ever-increasing cost of health care is good for the investment banks because people with costly illnesses will be desperate to sell their life insurance policies at a good price, so they can get some cash to pay for their health care. It's a virtuous cycle!
Raw Story spells out the perverse incentives that this would create:
One of the principal dangers in this plan is that it creates an incentive to see ill people die quickly. The investors who buy life insurance policies have to pay the premiums on those policies in order to collect when the original holder dies. So the faster an ill person dies, the fewer premiums have to be paid, and the higher the profit.
Conversely, life insurance securitization would create a disincentive for finding cures for diseases. If a person sells their life insurance policy and then their illness is cured, the investor who bought their policy loses money.
And, this is the doozy:
Thus the plan to securitize life insurance would likely create even more resistance among bankers and investors to any plan to reduce health care costs, or to introduce a public health care option. Indeed, a public health care option would eliminate the need for terminally ill people to seek new sources of money, thereby potentially decimating the life insurance securities market.
You might have noticed from the quote about AIDS treatments, above, that a "secondary market for life insurance" has been around for a while. The difference is the securitization of the market, which is exactly what led to the housing boom and bust.
Again, from Raw Story: "the life-settlement market in existence today is worth about $18 billion to $19 billion, meaning that about that amount of life insurance policies is bought and sold every year. The Times estimates that a securitized market for life insurance policies could be worth about $500 billion."
What kind of profits might there be in this business? Here's a handy chart from the Times:
The answer, lots and lots of profit. Goody!