Wall Street's $500 billion plot to profit from your death

Unless someone stops it, Wall Street is cooking up a plot to profit from your death. To be fair, Wall Street is hardly the first to think of this -- life insurance companies have been doing it for years. But Wall Street's new twist is that it wants to do what it did with sub-prime mortgages to bundle up wagers on the dates that thousands of life insurance policyholders will die.

And thanks to a new kind of ratings agency which will attest to the safety of its new product, the New York Times reports that Wall Street sees a $500 billion opportunity to convince institutions to buy this latest investment concoction. That is? securitizing life settlements -- paying a life insurance policy holder a portion of their death benefit while they're still alive.

Before getting into the details of Wall Street's latest plot, it's worth pointing out that securitization -- the practice of bundling thousands of individual loans into a trust and selling securities to big investors backed by the loans with a AAA rating from an agency paid by the issuer -- is what brought the globe to the edge of the financial precipice. That led to a loss of $30 trillion in stock market value last year and the U.S. has forked over up to $23.7 trillion to keep the dike from bursting. I've argued that we need to end securitization.

Wall Street's idea is that the thousands of securities in these bundles -- which will consist of life settlements from people with a diversity of diseases -- such as breast cancer, Alzheimer's, Leukemia, and heart disease -- will reward investors by paying them the difference between the death benefit and the sum of three numbers: the amount that the policyholders get paid while they're alive, the life insurance premiums that the investor must pay until those policyholders die, and the cost of capital to finance the transaction.

In simple terms, Wall Street will be setting up a casino so pension funds and other institutional investors can place a bet on your date of death. Wall Street will extract fees for running the casino -- just as it did with mortgage-backed securities (MBS).

And investors will rely on a new class of ratings agencies -- such as DBRS, co-founded by a nuclear engineering PhD -- which will measure the risk of these life settlement-backed securities (LSBS). And the risks are considerable. First among them is fraud -- unless a very ethical person takes the time to examine the medical records of each policyholder, there is enormous potential to simply make up fake policies -- just like the liar loans that brought down the MBS market.

Then there are the risks of people living longer than the actuarial tables predict -- which could cause LSBS investors to end up making very little money or even losing it. Or -- heaven forbid -- scientists discover a cure for the disease that threatens some of the policyholders and instead of dying an early and profitable death, those policyholders get healthy and live a long life.

Wall Street is plotting to profit from this business. Credit Suisse is setting up an assembly line to manufacture LSBS. And Goldman Sachs Group (GS) operates an index that lets investors bet on when someone will die.

I wonder if they'll also hire secret hit squads to assassinate policyholders who live too long.

Peter Cohan is a management consultant, Babson professor and author of eight books including, You Can't Order Change. Follow him on Twitter. He has no financial interest in the securities mentioned.

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