And Next Up, A Good Game of RISK

If you still need motivation to get on my bandwagon for new bank regulation, go read “Back to Business: Wall Street Pursues Profit in Bundles of Life Insurance.” While the nation is having a good scream over communists in the White House and Bolshevik health care reform, the bankers are playing Risk with your tax dollars.

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,” policies for life insurance for elderly parents which allow the 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.

Oh, that’s just great! The same folks left unregulated and un-rebuked from the mortgage meltdown (and rewarded with subsidies) get to misprice yet another set of iffy securities. If this isn’t a more “exotic” investment than credit default swaps and harder to price, I’ll turn in all my Phd class credits (including the one specifically geared to Risk Theory) for an electrician’s license. Investment bankers seem to be on hyperdrive to find the next big thing before congress even realizes the horses are back out of the barn again.

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