Dun dun duuuuun!
Not surprisingly, the New York Times’ article about the creation of life settlement securities has caused a bit of an uproar within the community of people who can read boring articles about financial arcana and muster a sense of outrage (Naked Capitalism, for one. As her post title suggests, Yves Smith is seemingly not so bothered about the same issues as Taibbi, predictably, is outraged about).
Nutshell summary of the article: There are these things called life settlements, where someone takes over, in a manner, someone else’s life insurance policy. The original policy holder gets cashed out at a reasonable fraction of what the eventual policy payout would be, getting money when they’re above ground to spend it, and the ‘investor’ gets to cash in at the death of the original policy holder. Especially if the policy holder dies nice and early, which would provide the greatest return on investment.
The financial wizards on Wall Street apparently want a piece of this hot action, and so want to get a vig on every future transaction of this type by creating a market to package and distribute (and, of course, market) these settlements as securities, so more investors can engage in this type of morbid gambling, and I suppose diversify they’re investment at the same time. All while our surviving major financial institutions collect fees on the securities’ transactions.
Get it? Good.
It’s a rather gruesome subject but actually does merit some consideration on numerous points that the two posts address.
To start off with the sexy (and, in my mind, most obvious point): Holy crap, we’re betting on when people will die now?
That was Taibbi’s response in one sentence. Understandable response, and certainly my first reaction to the news of life settlements many months ago. But aside from the obviously repugnant notion that each stroke and heart attack is accompanied by a dark suit on Wall Street doing a fist pump and shouting “Cha-CHING!”
But there is another party involved: the original policy holder (if I keep calling them that, I’ll forget they’re people… an integral component of financial innovation). As much as the original policy holder may have intended for his or her life insurance policy to ensure that surviving family would be taken care of and the horrific financial turmoil of our wedding-level-extravagant Western burial ceremonies would be less taxing, shit happens. If those loved ones who were so much the center of concern in the writing of the policy need money a bit sooner than you need eternal rest, a life settlement sounds pretty damn logical. I certainly wouldn’t want to feel like my rigorous constitution were keeping my kin in financial distress.
And, of course, there’s the less Oscar-bait-plot and much more entertaining scenario: That your loved ones have grown dickish in your declining years and you’d rather their ecstasy from the news of your passing be tempered by the surprise that the beneficiary of your life insurance is a pension fund or numbered company: A drop kick from beyond the grave, if you will.
And having read Matt Taibbi’s articles since he wrote for the now renamed The Exile, the disappointing Buffalo Beast, Rolling Stone Magazine, and his numerous blogs (Alternet and The Smirking Chimp no longer gets updated since he moved to True/Slant, it seems), and having read even a few of his books, I can safely speak as much as for Taibbi as he could himself: Taibbi LOVES that dropkick from the grave scenario.
So why the hate, Taibbi? Beyond that your arch-nemesis, Goldman Sachs, appears to be prominently involved. Can’t an old man enjoy the the fruits of his misfortune while he still draws breath?
Now the less sexy and more serious issue is brought up by Naked Capitalism (of course). And really, how many other blogs would skip right past the whole “betting on granny’s weak heart” component and go straight to:
“On a small scale, this is a useful service to people who are in a bind. But the ramp up that Wall Street intends, of marketing the idea more aggressively and securitizing the policies, is likely to put all life insurance customers at a disadvantage.
The big reason is that many policies lapse (as in the owner of the policy fails to make payments. Those lapses are included in current pricing models. Investors will not miss payments, which means insurance providers will pay out more often than in the past on life insurance policies, which in turn means their profits will deteriorate, which means they will raise rates on everyone.”
[Apologies for the big snip today: I highly recommend reading Yves' post in full, which goes into detail about how Japan's approach to financial innovation differs and the very practical relevance of Japan's system to a large scale proliferation of these securities]
So Yves surprisingly portrays life settlements, especially it’s wider adoption, entirely in the negative. I do not mean to disagree with her conclusion that there will be higher numbers of life insurance payouts due to the understandably more diligent payment of premiums by investors, but why is this depicted only as a negative for policy holders in general? I feel Ms. Smith woefully neglects counterpoint that many of those who have perhaps paid premiums for years or decades and allow their policies to lapse due to distraction (being on your death bed, I imagine, could cause that) or due to financial stress (being on your death bed, I imagine, could cause that too) are able to obtain a healthy portion of their eventual payouts.
Due to life settlements’ wider adoption, many more are likely to receive a partial payout rather than pay premiums for years only to fail to maintain coverage at the very end. Insurance companies will lose profits as a result, and will likely pass on leaner profits into higher premiums, but these profits are a direct transfer to financial institutions and investors (perhaps not a very sympathetic group at the moment), as well as the elderly and their families who find themselves under financial strain.
Is that so awful? [Aside from the whole rooting for death's speedy embrace of a financially desperate stranger thing]
… and the cow goes moo
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