Sunday, September 6, 2009

The Banksters: From Predators to Parasites to Scavengers

An article in The Sunday New York Times caught my eye today.

At first, I couldn't believe what I was reading. It sounded too much like a parody
from The Onion that somehow made its way to the front page of the Times'
business section.

But it's real. From the Times :

After the mortgage business imploded last year, Wall Street investment
banks began searching for another big idea to make money. They think they
may have found one.

" 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. " The idea is still in the planning stages. But already “our phones have been ringing off the hook with inquiries,” says Kathleen Tillwitz, a senior vice president at DBRS, which gives risk ratings to investments and is reviewing nine proposals for life-insurance securitizations from private investors and financial firms, including Credit Suisse. "

Wow - now that's innovation. Buying Grandma's life insurance and betting
against her life expectancy.
But to The Thinking Nationalist, something
like this was bound to happen sooner or later.

It's an opportunity that has basically been created by the stinginess of the
life insurance industry, when it comes to cash surrender values of traditional
whole-life insurance policies. However, there are reasons for that stinginess;
first. a significant portion of life policies actually lapse before the
insureds die, and also the fact that many policies convert after a number of
years to "paid up" - no more premiums - paying off either on a sliding scale
or at full face value should the insured outlive the actuarial assumptions.

And it's not a new idea. Twenty years ago, there was a market for "viatical"
settlements for insured young men afflicted with AIDS. Investors would buy
the insurance policies of these individuals for, say, 30-40% of face value,
continue to pay the premiums, and then collect the full face value when the
insureds died of what was then a short-duration terminal illness.

The economics of those arrangements changed, though, when the development
of modern antivirals changed HIV infection from a fatal illness to a relatively
"manageable" chronic condition. People started to outlive the investor's
calculations, and the market went away.

But the idea didn't go away entirely. It's not well known, but for many years
people with certain types of high-value life insurance policies have been quietly
selling them for cash, depending on age and life expectancy, for up to
45% of face value. There are even a few brokers in retiree- heavy parts
of the country who make this a specialty. But for obvious reasons, it's been
kept quiet - both legally and ethically, it's a "gray" area for many people.

But if the Banksters get their way, that may all be about to change.

Credit Suisse isn't the only one involved. Deutsche Bank already has
a formal program to match insureds with willing investors. But it's
everyone's favorite Bankster group - you guessed it, Goldman Sachs -
that's planning on taking this to a new level.

First, they've already created a tradable Viatical Index for these types of
securities, based on different actuarial assumptions of age mix
and expected illnesses and death rates. The structuring of
different classes and tranches of "viatical pools" will not be
far behind. And with their computing and mathematical prowess,
creating the necessary hedging Derivatives will shortly follow.

And for rating these securities? Moody's and S&P are working
on that right now. All the building blocks for an "assembly line"
- buying policies, putting them into pools, rating and structuring securities,
and marketing them to institutional investors are being put into place.

And with $26 Trillion in life insurance in force in the United States,
even a small slice of that - say, a twentieth - is a big enough market
to keep the Banksters happy.

Just think of the public policy implications. If the Securitized Life Settlement
industry becomes large, you won't have to be a rocket scientist to think about
where Wall Street will be on Health Care Reform. How about medical research?
Won't be a lot of money going to Biotech if this becomes big - in fact, I could
see shorting the Biotech sector as a hedging tool. And the derivatives would
be mind-boggling; depending on who in the pool died this week ,
and what they died of, Goldman may need to be, say, Long Alzheimer's
and Short Kidney disease this week, or vice versa.

However you slice it (and these pools will be sliced and diced
finer than Grandma's famous potato salad), this is serious money for
all kinds of serious players. Think of the tie-ups. Death Panels?
Maybe we can hire Blackwater for that. And how about the
Health Insurance industry?. Buy SLS bonds, and then
denial and cancellation really makes money. And think
of all the new advertising campaigns: "Eat More Red Meat!"
"Over 65? Medical Experts say Exercise is Bad for You!"
and the topper: "Don't Smoke? START NOW!"

The possibilities are limited only by the fevered imaginations of
ghoulish minds. And there are plenty of those on Wall Street.

More importantly, the advent of Securitized Life Settlements
completes an important 25-year transition for Wall Street.

Twenty-Five years ago, the Banksters were Predators.
Like lean and hungry wolves, the likes of Drexel Burnham Lambert
devoured the fat, slow-moving sheep of Corporate America.

After all, sheep made products and employed Americans in
America at good wages. Their low stock prices and slow,traditional
ways made them vulnerable.

But the sheep adapted to predation. By selling off or shuttering
those operations that the wolves found useless, and shipping the
rest to China or Mexico, they gradually put themselves out of
reach of the Predators.

So, ten years ago, the Banksters adapted, by evolving into Parasites.
First, they removed all the legal and regulatory restrictions
to Parasitism. Next, they recruited the nation's brightest
and best-connected minds into new careers as Parasites.
Talented young people who might otherwise have become Doctors,
Scientists, or Entrepreneurs now became Ticks (investment bankers),
Tapeworms (securities lawyers), and Maggots (analysts and traders).

And the well-paid young Parasites set to work with a vengeance.
Soon, all the remaining sheep were infected with all manner of parasite-borne
illnesses - including indebtedness, rent-seeking, and speculation -
on a scale that hadn't been seen for generations.

And soon, the flock could stand no more. Hobbled by parasite-induced
outsourcing and offshoring, bellies distended by bankruptcy, with great
open sores from unemployment and foreclosure all over their bodies,
the infected flock finally began to fall sick and die.

Which prepared Wall Street for its final evolution. Ticks, Tapeworms
and Maggots now became Hyenas and Jackals, ready for the great
Carrion Feast.

And the Hyenas and Jackals approached the Shepherd, Obama, and
said to him: "Don't cry for your old sheep. They were sick and
unproductive. They overpaid and overvalued their people. You need new sheep.
Chinese sheep, Indian sheep. Mexican sheep. Hardy. Disease-resistant.
Smart. And they don't eat much and their employees are all in China, India
or Mexico. And that keeps jobs scarce, wages low, and benefits non-existent.
You need that to be a competitive Shepherd. Don't Worry - Be Happy.
It's for the best. Trust us - we're Wall Street. We know what we're doing."

Yes, it's an old tale. When the herd dies, the Vultures circle. But I wouldn't call
the Banksters vultures.

That would be an insult to proud and tough birds who do necessary work.

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