I was reading the New York Times today and saw this story: Back to Business - Wall Street Pursues Profit in Bundles of Life Insurance - Series - NYTimes.com: "Critics of life settlements believe “this defeats the idea of what life insurance is supposed to be,” said Steven Weisbart, senior vice president and chief economist for the Insurance Information Institute, a trade group. “It’s not an investment product, a gambling product.”
The overall article caused my skin to literally crawl. Some things come immediately to mind. Purposely innocuous terms such as "life settlements" need clarification. It seems like "securitizing" will upset people even more. It is morally questionable and worthy of condemnation to bundle or pool completely unrelated policies taken out by people who do not know each other, people who wanted to protect beneficiaries against future loss based on their individual policy premium payments.
Here is an anology. You have ten horses you have taken care of for years. A cowboy has a lame horse. He comes to you, the rancher, and says: "My horse is lame, can you borrow me one, and, as insurance, that nice gelding, too, as I'se a got a couple high-stakes rodeos comin' round and needs a backup, too." The farmer thinks rodeos are just great and agrees, charging 15 dollars a week per horse, but says he does't want to read about his horse in some cockamamie bank holdup in Montana, either. Oh, and just leave your lame horse with me, I'll have her good as new in 2 months. The contractual parties agree that the rancher's horses cannot be temperorarily "subletted" to anybody else. The cowboy ends up using the one horse each weekend in calf-roping, rents the other one to his barrel-racing cousin on the rodeo tour and during the week hires the horses out as draught horses to a quarry. The vagabond entrpreneurs make 250 bucks a week, per horse. A month later the cowboy returns the horses, who are looking rather gaunt, pays 30 bucks for feed for his recovered horse, takes it and rides off, not troubled by what he did.
All semblance to the life settlement and CDO industry is purely unintentional. It would seem like a horse or a pile of premiums just lying there is just too irresistible to some people. At what point does someone blow the whistle?
Insurance corporations are involved in pooling risk with potential profit involved. These insurers are accepting premiums from individuals and it behooves (get it?) the insurers to reflect on the example they set if they use the premiums entrusted to them for synthetically depersonalizing and spreading risk against potential loss with a profit motive, rather than just assessing normal actuarial risk.
The mechanics are questionable. Using policy premiums to involve more intermediaries making front-end fees should be made a punishable offence and severely mandated against. If insuraers lack self-control, government regulation is warranted.
The problem is that premiums paid don't look like horses being dishonestly rented out at rodeos. In this modern IT age, why is that not possible, to introduce an "Old Paint" tag to prevent abuse of premiums.
There is a cloak of smoke covering up what is happening. Who in the world among us people who lead a normal workaday life can get their head around "collateralize" and "debt obligation" all in one product name. Shouldn't it be renamed: "A vehicle for intermediaries to earn substanital fees from originating and "securitizing" life insurances policies"?
These deals, so brazenly made to sound harmless by generic-sounding labels such as "collateralized debt obligations" (CDOs) appeared to the Wall Street investment firms to be, to use The Washington Post's phrasing (thank you, Jill Drew), a "surefire way to profit from the booming real estate market without much risk to their companies. They engaged in a kind of financial alchemy, creating a trillion-dollar chain of securities on the back of subprime mortgages and other loans, which were sold to investors in private offerings that no government regulator scrutinized."
The sub-prime loans tanking nationwide stripped back the opaque names given to these "derivatives" and reverse-hedge hocus-pocus. The smoke cleared in every part of country and caught them with their pants down, shrugging their shoulders and saying: "... but I never intended to actually poison the well, after all I only poured things in for a few seconds." Or: What exactly did happen to Hamlet, that only took a few seconds, too, right? The spirit and intention are longer in the making. Can the concentration of financial prowess be to some degree removed from Wall Street or London financial powerhouses or what-have-you given how what they do sometimes occurs unfairly on the backs of the workforce. At the expense of what are actually people who are not driven by the profit mantra alone? Most people just want a fair benefit from working honestly and creatively.
