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By Reese Erlich

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Wall Street Comes Up With a Great Idea for the Next Recession

Posted on Sep 7, 2009
Flickr / Katrina.Tuliao

The geniuses on Wall Street have found another way to gamble and call it investing. Forget about mortgage-backed securities (wouldn’t that be nice?). Life insurance securitizations are the new hotness on Wall Street. And the fun part is, they make more money when you die faster.

Maybe death panels will make a comeback.

The New York Times explains how it works:

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. [Link]

Will someone please regulate these people before we have to go running to the Chinese for even more money to bail them—or what’s left of us—out?

Let’s just summarize this: Rich people have found a way to gamble on how long financially desperate people will live. We are living in a Philip K. Dick novel.  —PS

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By Paracelsus, September 7, 2009 at 12:56 pm Link to this comment

This will open up a whole new underground industry. Wet boy work to kill insureds who won’t kick off soon enough. I think this could be expanded to the reverse mortgage industry. Greed is the engine of creativity.

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By Skinny Freddy, September 7, 2009 at 11:27 am Link to this comment
(Unregistered commenter)

Nothing will stop these people short of a full blown revolution(and any revolution that has any chance of happening any time be by right wingers who would give
the a-holes even more power,because the left has become too meek,too soft to even think such a thing.)
Changy McChange has shown he is just as big a corporate stooge as any Republican-perhaps even more so.I’m sure Tim “no Clue” Geithner will think this is a marvelous idea.

It’s not “1984”,it’s frigging “Rollerball”(the original).

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By Inherit The Wind, September 7, 2009 at 11:26 am Link to this comment

Vultures can’t help it—they are vultures.  But I wonder if the insurance lobby (like AIG) will mount their OWN battle against this latest scam, this latest financial “product” that’s no product at all.

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By glider, September 7, 2009 at 10:49 am Link to this comment

Seems to me that all these Investment Bank bailouts and Fed stimulations are going to be very inflationary down the road.  It’s OK and not inflationary to print money that goes to put people to work because there can be a commensurate increase in goods and services.  However, when printed money just goes into a financial “services” gambling casino you end up with more money chasing limited goods and services.  A good prescription for inflation.  It may not be on the immediate horizon but it is something to be very wary about.

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By jack, September 7, 2009 at 10:36 am Link to this comment
(Unregistered commenter)

probably beyond PK Dick - the ultimate derivative investment instrument - if
what’s being rumored about the H1N1 - is on target -
this could be a redux of the 9/11 windfall in put options - who knows what and
since when have they known it?

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By Financial Progressive, September 7, 2009 at 10:20 am Link to this comment

Ah, the joys of watching the capitalist utopia of Dickens re-construct itself..
Currently, it is illegal to take out a life insurance policy against someone with whom you do not have a financial interest. That is so, because back in the early days of the insurance exchange (Lloyd’s of London)  people were allowed to take out insurance on people they did not know.  The person would then suddenly die, and a financial windfall went to the prescient investor (thanks no doubt to a contract killer).
The American corporation is now finding a way around that law… and they always get their way. 
Contract killing may be an even bigger growth industry soon! If this goes through, my bet is on Blackwater - the premiere corporate death squad!

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By godistwaddle, September 7, 2009 at 8:48 am Link to this comment

Oh, come on.  Life insurance itself is you betting you’re gonna die and the insurance company betting you’re gonna live long enough to make their payout less than your input (plus interest, etc.).

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By Hank Van den Berg, September 7, 2009 at 8:16 am Link to this comment
(Unregistered commenter)

Your brief article leaves out the most significant effect of this latest financial “innovation,” which is that the financial geniuses end up profiting at the expense of most everyone else. 
As it stands now, most policy holders stop contributing to their life insurance plans after children move out and the adults in the family accumulate other assets for retirement.  In these cases, the money already paid in accrues to the insurance companies.  Insurance companies price this “income” into their policies.  Therefore, if these financial geniuses “buy” the policies from individuals and then bundles them and carry them until the individuals’ deaths, the insurance companies will have to pay out the full insured amounts on all the policies.  Hence, from now on life insurance companies will have to charge more for the insurance (if they don’t go broke first or require bailouts from taxpayers).
In sum, the financial firms that cash out policyholders and sell the securitized bundles of policies will earn money from both the bundling, managing, and playing the markets for these securities.  But all future purchasers of life insurance will pay more for protection.  This is, therefore, a distribution from all future life insurance purchasers to the financial industry promoting these new securities. 
Let’s not forget what life insurance is for, which is to insure families against the loss of income due to the death of the wage earner(s) in the family.  This is most important for young families with young children.  This latest innovation makes life insurance more costly and thus less accesible for lower income families. 
Yes, the Wall Street geniuses also gain if the bought-out policyholders die sooner rather than later.  And so it goes.

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By Stephen Smoliar, September 7, 2009 at 7:54 am Link to this comment

This seems like the inevitable next step after one of the more nefarious practices exposed by Michael Moore in CAPITALISM:  A LOVE STORY.  Here is how it was described in the BBC report from the Venice Film Festival:  “Moore also uncovered a shocking practice of big companies taking out life insurance policies on their workers, with one company benefiting to the tune of $5m (£3m) when one employee died, while his family received nothing.”  Now that corporations have found a new way to exploit the masses, the bankers want to get in on the game!

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By Jim Yell, September 7, 2009 at 7:44 am Link to this comment
(Unregistered commenter)

Where are the regulations and the laws to control any further outrages by this class of criminals? This news makes me even happier about the French man who bought an old ladies property with a contract to allow her to continue living in it until her death and he had to pay all the taxes and such. She lived for decades and he died first broken by a (for him) bad deal. A clear case of poetic justice.

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By Rodger Lemonde, September 7, 2009 at 6:56 am Link to this comment

The new $oylent Green, money is people.

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By BobH, September 7, 2009 at 6:39 am Link to this comment
(Unregistered commenter)

Make’s sense, let’s create a financial incentive for people in this country to die
before their time.  We can kiss the public option goodbye.

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By Fat Freddy, September 7, 2009 at 6:16 am Link to this comment

Do you think, maybe, we could just convince the Federal Reserve to stop pumping so much cheap money into the economy?

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