[Infowarrior] - Wall Street: Here We Go Again...

[Richard Forno]

Back to Business
Wall Street Pursues Profit in Bundles of Life Insurance
By JENNY ANDERSON
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.

“We’re hoping to get a herd stampeding after the first offering,” said  
one investment banker not authorized to speak to the news media.

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.

In addition to securitizing life settlements, for example, some banks  
are repackaging their money-losing securities into higher-rated ones,  
called re-remics (re-securitization of real estate mortgage investment  
conduits). Morgan Stanley says at least $30 billion in residential re- 
remics have been done this year.

Financial innovation can be good, of course, by lowering the cost of  
borrowing for everyone, giving consumers more investment choices and,  
more broadly, by helping the economy to grow. And the proponents of  
securitizing life settlements say it would benefit people who want to  
cash out their policies while they are alive.

But some are dismayed by Wall Street’s quick return to its old ways,  
chasing profits with complicated new products.

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http://www.nytimes.com/2009/09/06/business/06insurance.html?hp=&pagewanted=print