In plain English, this refers to the practice of large investment banks combing through the wreckage of the subprime-mortgage collapse, looking for relatively stable mortgages, rebundling them into the types of packages that caused all kinds of havoc last year, and then selling them again to eager investors. Deja vu all over again.
But if the term causes a sad shaking of the head, the latest money-making Wall Street scheme sends a chill down the spine. It involves the "life settlement" industry.
Life settlement itself sounds like a somewhat clever--if morally dubious--practice. The basic idea: Let's say you are 75 years old and have a million-dollar life insurance policy. Your kids are all grown and financially secure, and you really don't feel like continuing to shell out monthly premiums. Many people might just stop paying and let their policies lapse. But what about all the money you've sunk into this policy over however many years you've held it?
This is where life-settlement agencies come into the picture. A company might offer you a sizable chunk of the policy's value--say $400,000--in exchange for which you sign the policy over to them. They continue making the premium payments and, when you die, they collect $1,000,000.
If you think about it, this isn't a bad idea: You pocket a nice chunk of change to enjoy in your golden years, and, assuming you don't defy the actuarial odds and live another 25 years or so, the life settlement industry itself reaps a tidy little profit, even after paying you the 400 grand and however much more in monthly premiums.
Enter Wall Street.
See, if one little company can make a tidy profit off of one transaction, then perhaps one gi-normous company can make a filthy profit by bundling these "life settlements" and reselling shares in these bundles to aggressive investors. This, as far as we understand it, is known as "securitization."
Now, we know that the market is an amoral place, but do you think it bothers these investors at all that they are essentially betting that they will make a profit off of people dying in a timely manner? Because, you see, if the insured people whose policies are being bought out have the audacity to beat the actuarial odds, they cost the life-settlement agencies money: Those companies will have to continue paying premiums for a longer period of time, and the underlying policies thereby become less profitable--if not, indeed, losses.
The big banks are hedging their bets: "Goldman Sachs has developed a tradable index of life settlements, enabling investors to bet on whether people will live longer than expected or die sooner than planned." Surprisingly, "Spokesmen for. . . Goldman Sachs declined to comment."
Think that's ghoulish? Consider this straightforward explanation of the best way to diversify an index fund: "A bond made up of life settlements would ideally have policies from people with a large range of diseases--leukemia, lung cancer, heart disease, breast cancer, diabetes, Alzheimer's. That is because if too many people with leukemia are in the securitization portfolio, and a cure is developed, the value of the bond would plummet."
Yes, that's right. As these bonds proliferate, Wall Street's Masters of the Universe will be praying AGAINST a cure for cancer.
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