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What next, Soylent Green?

Written By: - Date published: 5:31 am, September 16th, 2009 - 29 comments
Categories: capitalism, class war, economy - Tags:

The Wall Street financiers crapped out on their sub-prime gambles, inflicting economic devastation on the taxpayers who generously bailed-them out in return. Now, they need a new gamble, a new game in which they bet using other people’s money while skimming off the cream for themselves until it all collapses.

The new game? Betting on when people will die.

It works like this:

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.

It’s pretty similar to what happened with the sub-prime market. Bankers put the dodgy mortgages they had lent to poor people to buy over-priced houses together in packages (CDOs), which investors bought getting the payments from those mortgages as the return on their investment. Of course, as we now know, the financiers on all sides over-valued the CDOs because they were basically betting the housing boom would continue forever. When the mortgage payments started to dry up, thanks at least in part to the rising price of oil, the value of the CDOs collapsed and so would have the financial system without government bailouts.

But this new sub-prime disaster in waiting has a nasty twist:

The earlier the policyholder dies, the bigger the return

It’s a good time to be making that bet now in the US. People are losing their jobs and their health insurance. Poverty is rising and, with it, health is declining. People need cash, especially if a health problem hits the family (health problems are the most common cause of bankruptcy in the US). The Wall Street vampires offer a rip-off price for life insurance policies and wait for rising poverty to fill their coffers. There are predictions the market for these death-bets will grow to $500 billion, approaching the size of the sub-prime market at its peak.

Of course, that gives the investors a big reason to oppose health reform. Better health-care would see them take a bath on their death-bets (the money-men in the middle make their fees either way). Now, we see another reason why the big money that hides behind the screaming hicks at the town-hall meetings is so keen to stop universal health-care in the US.

And what happens when this bubble bursts? What happens when health reform and/or an improving economy improves people’s life expectancies and the Wall Street vampires find there’s not as much blood to suck as they bet on? Another collapse? Another round of bail-outs?

Isn’t it time to radically reform this dysfunctional capitalist system? With its unethical, short-term fixation on money, doesn’t it create more ill than good?

Can’t we do better?

[hat-tip eXiled Online]

29 comments on “What next, Soylent Green? ”

  1. tsmithfield 1

    On the other hand, maybe its just the market meeting a demand.

    One of the BIG problems of life insurance is that the policy owner never gets to enjoy the benefits, for obvious reasons. There are some policies that pay out for permanent disability, but who wants to be in that state to enjoy their nest-egg?

    The question is, is it a good deal for the policy holder to get paid out at a lessor rate than the death premium?

    The answer is, it depends. What is required is a net value calculation for money measured against the expected average lifespan of policy holders.

    Interest rates a very low at the moment, so at present rates it might not be seen as a good deal. However, it is inaccurate to factor these rates for decades ahead. Looking forward, interest rates are projected to rise considerably as governments have to control the inflation that will result from all the stimulus poured into the system. Thus, it might well be that getting paid out early at a lessor amount is actually quite a good deal for the policy holder.

    Firstly, the policy holder and their family get to enjoy the money together rather than apart.
    Secondly, they may be nearly as well off, or possibly even better off, over the long run getting the money earlier anyway.

    • tsmithfield,

      What a hideously cynical way of reasoning.

      You find people who are in dire need for treatment and buy their life insurance for pennies on the dollar and that is meeting a market demand? revolting.

      It would be morally reprehensible if it was just that alone but when you realise that the upper 1% of the Global elite hold interests in the healthcare insurance business and the banks that buy these life insurances it becomes a truly monstrous and murderous orgy of greed.

      • Macro 1.1.1

        It’s not because the supposed “free market” delivers the goods or not, that the neo-liberals of this world are so wedded to it. Of course, they cannot conceive that there might be other ways to fairly distribute the goods; and its not even the fact that they cannot think of any other way to run an economy. The simple fact is – that they are wedded to the “free market” because essentially they worship the god of mammon. Greed is their consuming passion and anything that gets in the way of them making a quick buck is to be roundly condemned as either “communist” “socialist” or some other equally offensive slur.

        • Quoth the Raven 1.1.1.1

          Of course we don’t have a free market system. Look up the definition of free market. Blaming the ills on this world on the free market is akin to blaming it on communism. Communism is not in operation and neither is the free market. Neo-liberals are not wedded to the free-market, they’re weded to state-corporate-plutocracy as are many so-called social-democrats. And look at the history of socialism, Historically and contemporarily there have been plenty of socialists that support the free market.

    • Maynard J 1.2

      Do you understand what life insurance is actually for? It does not appear so.

      If you want to have money to spend with your family when you are alive, you fund your retirement. If you want money to settle your estate, ensure an inheritance can be paid out to your survivors and ensure they are comfortable after your death, you get life insurance.

      If you put more importance on the former, then get cheap (or no) life insurance, and put that money into your retirement fund throughout your working life. Do not sell out early on a bet that you will die to set up a fund that will benefit the earlier you die, thus bringing about a massive financial incentive for poor healthcare and declining life expectancy.

      Sheesh, it is like a lesson on how to engineer a market failure.

  2. Mark M 2

    reverse annuities are not new and are popular with older people as they get some money to live out their retirement.

  3. Mach1 3

    What next, Soylent Green?

    Viager?

    • Marty G 3.1

      yeah, again, I don’t have a problem with reverse annuities or life insurance in itself. It’s the exploitation of desperate people to create a market in the hundreds of billions where the wealthy elite bets that those less well off than them will die early

  4. tsmithfield 4

    travellerev,

    Under the scheme as outlined, people who are very sick, and likely to die are likely to get paid out a far greater percentage of the policy

    Anyway, sounds like a great opportunity. I think I will do some investigation to see when and if this scheme is going to be offered in NZ. If it is coming here in the near future, I think I will quadruple the amount of life insurance I hold. Then when I get offered a payout, it will probably be hundreds of thousands higher. This probably will have only cost me a few thousand in extra premiums. Nearly as good as winning Lotto!!

    • Marty G 4.1

      You’re a financial illiterate. Do you think the financiers’ profits come out of thin air? they come from ripping off the desperate.

      If you read the NYT article you’ll learn this will actually push up premiums.

      • jagilby 4.1.1

        Ahhh I think that the profits would actually come from the insurance companies who are going to hate it. But I guess there is an argument that this will result in higher premiums that will inturn hurt the most vulnerable, so point taken.

        Just for the record I am in investment banker (yes, I am your anti-christ. Please direct all cliched vitriol in this direction) and I find this product morally abhorrent. In any case, even I didn’t find it morally distateful, it’s not an investment; it’s a gamble and I think this could be a particularly hard sell for banks.

        I can see the insurance companies really rallying against a product like this. I don’t think it quite has the same economy-busting potential that CDOs et al did given the fact that the uncertain nature of the underlying asset or security (if we can call it that) is well recognised.
        A big part of the problem with CDOs was that the exact nature of the underlying asset (quality and location of house and service abiilty of mortgagee) was clouded by negligence on the part of the rating agencies. I don’t think anyone can claim ignorance on not knowing how certain a death date was.

  5. Marty G 5

    One could argue that life insurance itself or reverse annuities are bets on when you will die but this is a whole new level. This is turning a population’s life expectancy into a commodity that can be securitised.

    We’re talking a market growing to the size of sub-prime.

    It gives the wealthy an incentive to have the middle class (the poor don’t have life insurance) poor, unhealthy, and dying earlier

  6. Lanthanide 6

    This seems like the perfect topic for Obama to have a speech about. Rebut all the ridiculous “death panel” claptrap by pointing out the vampirous wall street elite who created the financial crisis are now resisting public healthcare because it hurts their bottom line. I think that could be quite persuasive to the country hicks – then again no one likes to be told they were just a pawn in a larger game, so they could resent it and think Obama is just trying to say anything to get them to agree to his idea.

  7. grumpy 7

    Christ Marty G, I have to have a lie down.

    A very good post and you are 100% correct, this is a prime example of the inhumanity of the Capitalist system and how it “creates” a demand it can then fill with this type of disgraceful product.

    You are correct, it’s the sub-prime shonky deal all over again.

    Wankers like these give Capitalism a bad name – I’d support putting them up against the wall, comrade!

  8. tsmithfield 8

    Reading the article, it looks like these options are only going to be available to those who are quite sick or elderly anyway. Otherwise, there is little prospect of return for the investor.

    Why shouldn’t people in these circumstances be able to cash in a portion of their life insurance to enjoy life while they can?

    Are you all so ingrained in the socialist paradigm that you think that people are all too thick to work out their own circumstances for themselves?

    • Maynard J 8.1

      Do you view capitalism through such rose-tinted glasses you are unable to spot exploitation of the vulnerable when it smacks you in the nose?

      Not to mention the inevitable consequences of the idea – why are people who like capitalism incapable of seeing consequences of actions past the initial transaction? Well that is obvious – because if you do that you see the flaws, and then you probably stop liking capitalism so much.

      To you it is Person Wants Something + Market Provides = Good. Look a little deeper.

      • grumpy 8.1.1

        It’s the repackaging as “bonds” that turns my guts. Not only do they rip off the vulnerable but also the “investor”.

        This is what made America great!

        • Maynard J 8.1.1.1

          Yeah, how on earth can someone make a rational investment decision on these. “We have all these life insurance policies, we have to keep paying them, but we will get money when people die. No idea if it is more than we will have to pay to keep the premiums paid up. Are you in?”

  9. 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.

    Didn’t Tonga nearly go bankrupt playing this game (on the advice of the previous king’s “court jester”) some years ago?

  10. tsmithfield 10

    As mentioned earlier, whether this is a good deal or not for the insured depends on a number of factors including present value of money calculations. Depending on the interest rates going forward, the insured might be better off financially taking the money upfront. This is all part of the risk vs return equation that both the buyers and sellers in the equation calculate.

    This actually looks like quite a good proposition for an investor, as well. One thing is sure. The insured people will eventually die. Thus, the capital will be returned at some stage.

    The only question is the rate of return. As mentioned in the first paragraph, this is all part of the risk vs return calculation that underpins capitalism and life generally.

    • Maynard J 10.1

      What rubbish. How can you make a calculation around whether you will be better off taking the money now, in present values, or when you are dead?

      There are two glaring problems there.

      “This actually looks like quite a good proposition for an investor, as well. One thing is sure. The insured people will eventually die. Thus, the capital will be returned at some stage.”

      Not if all that capital was spent maintaining the premiums because the person did not have the decency to die quickly enough. You really are financially illiterate, but then these products are made for people like you, who seem to believe in somehow making money “100% risk free”!

  11. gomango 11

    These are nothing new. Life settlements funds have been around for ages, and sold in NZ – for instance see: http://www.lifesettlementsfund.com. BTW, investors in this fund havent had a great experience – US actuaries updated the standard life tables int he US – life expectancy increased by more than expected, result was the policies in this fund fell in value by 20%. So that was a good result for those that sold the policies initially, a bad result for investors.

    It’s difficult to draw the conclusion that they are “ripping people off” – cant see many scenarios where that is likely. A couple of key points:

    – the lives being insured are typically average age around 75. Generally for this type of business there is no interest in purchasing the life policy of someone under 70.
    – there are very valid reasons as to why a 75 year old would buy a life policy, mostly around estate tax etc in the US. Proceeds of a life policy are tax free, it is very easy to structure ones affairs using life insurance to reduce dramaticallly the effect of inheritance tax
    – yes their is a potential moral hazard (ie you don’t want to sell your life policy to a bloke with mafia connections).
    – most states that allow the trading of policies have legally mandated minimum levels for consumer protection (based on published life tables).

    This business is quite tightly controlled in the states but yes open to abuse as any commercial activity is. Any reputable life settlements business uses a blind trust structure to hold the policies they have purchased. The other point to bear in mind with this business is that the policies in question typically have a size of 2 to 10mm – they aren’t being written on the homeless. Typical profile is a 75 year old in Florida, lots of physical assets, no cash.

    the origins of this business was actually the viatical market back in the 80’s. When AIDS was a short term, terminal illness a valid business emerged where the terminally ill were able to sell their policy to fund treatment or one last overseas vacation etc.

    Its hard to argue to argue against this business on moral grounds, as long there is a minimum level of consumer protection (which there is). And investors should be aware – the risk is that mortality risk decreases – obviously it tends to with improvements in health care (and bear in mind we are talking about the moratlity risks of the economically advantaged here). A cure for bowel cancer or a revolutionary anti heart attack drug and these policies decline in value dramatically. The only real area I see for moral ambiguity is the cozy relationship between structurer and institutional buyer., where high fees tend to mysteriously appear just before disappearing into a pocket or two. But that morality issue is entirely independent of the nature of the mortality risk.

    BTW, they are nicknamed “Death Bonds” by detractors. Although the sellers of these prefer Life Settlements or Mortality Risk for obvious reasons.

    In terms of the size of the market, the exact numbers escape me – I’ll find them as I cl;ean out my office, but from memery the size of the US life market is $100 trillion dollars (?) – so far I think the secondary market is only 1 or 2% of that.

  12. Draco T Bastard 12

    Just another example of capitalism taking wealth for no wealth creation.

  13. gomango 13

    Just found a couple of presentations from two different firms who buy and pool life policies:

    – 22 trillion of life polices in force in the US
    – expect secondary market to be 180 billion by 2030
    – traditionally, owners of life policies could only ever sell them back to the life company that wrote the policy. Secondary marke prices are typically 20% to 100% higher than the traditional surrender value
    – largest trader of life policies has bought 19 billion face value
    – average policy size is 3 million
    – only interested in life expectancy less than 20 years
    – minimum age 60 years

    And apparently the descriptive name of choice is “Longevity Bonds”.

  14. rave 14

    Radical reform?
    Does cutting it off at the roots qualify?
    There is only way to upset the gamblers (sorry actuaries) and that is to destroy the market.
    I’m for that. I would die happy and blow my savings this side of the grave.

    I would be very numbest (antispam!)

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