Woke up bleary-eyed on Sunday morning to find this all over the front page of the New York Times:
The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.
The earlier the policyholder dies, the bigger the return — though if people live longer than expected, investors could get poor returns or even lose money.
Either way, Wall Street would profit by pocketing sizable fees for creating the bonds, reselling them and subsequently trading them. But some who have studied life settlements warn that insurers might have to raise premiums in the short term if they end up having to pay out more death claims than they had anticipated.
In the aftermath of the financial meltdown, exotic investments dreamed up by Wall Street got much of the blame. It was not just subprime mortgage securities but an array of products — credit-default swaps, structured investment vehicles, collateralized debt obligations — that proved far riskier than anticipated.
The debacle gave financial wizardry a bad name generally, but not on Wall Street. Even as Washington debates increased financial regulation, bankers are scurrying to concoct new products.
If there are still folks who need convincing that Wall Street and financial markets need strict regulation and oversight, then the above should be the deal-closer. I’ll stipulate that there are good, responsible managers out there on Wall Street. But they aren’t the ones who got us into this mess. The trouble is caused by the large number of street-smart but unbelievably dumb hucksters who’s raison d’etre is to gin up a new scheme to separate as many people from their money as possible, and damn any common sense economic fundamentals.
I feel about these people the same way I feel about high-frequency trading. Of which another disturbing article — this time about the oil futures market — surfaced last week. They need to be snuffed out before they ruin us all with their snake oil jive.
They are like high school sophmores in chemistry class who have just learned the principles of the oxidation-reduction reaction. Just because they have recently learned some of the fundamental principles of nature, doesn’t automatically make them brilliant chemists. And just because you happen to have a bit of aluminum powder and iron oxide laying around doesn’t mean you should start playing around with it.
The idea that these Wall Street wizards are any smarter or more responsbile than the run-of-the-mill used care salesman is absurd.
