Grotesque? Macabre? Unquestionably, but that is what we have come to. After leading the economy to the edge of the abyss, a new derivative has been concocted in a perverse quest for big and bigger bucks. The New York Times screamed the story with a three-column headline on Sunday's page one "Wall Street Pursues Profit in Bundles of Life Insurance".
It works like this. The banks would buy "life settlements" that the ill or elderly -- or anyone who has a policy for that matter -- would sell for an immediate cash payout and depending on their life expectancy at time of sale, at a significant discount to the policy's death benefit. These policies would then be "securitized", that great Wall Street mumbo-jumbo word, by packaging "hundreds of thousands of policies together into bonds" whose owners will be receiving payouts when those who are insured die. Happy way to earn a buck.
Insurance companies, in anticipation of this new financial "product" impacting their industry have highlighted a few cautionary issues to their policy holders, among them:
-After the sale, the insurance policy will remain in force until your death and an unknown person, trust or institution will own the policy. The policy may be resold a number of times before your death, making it virtually impossible to know who owns the policy on your life.
-Because a policy will remain in force after a sale, you may be precluded from purchasing new life insurance or from replacing existing insurance on your personal or business planning.
-Since the policy may be resold you may be contacted by the owner of the policy inquiring about the status of your health. Since the policy may be resold repeatedly similar contacts may be made by different individuals in years to come.
It was bad enough to have the Wall Street whiz engineers concocting derivatives, credit default swaps and myriad other instruments that caused financial havoc while our government agencies snoozed away. And now, in today's world, conspiring to formulate the height of malign financial exotica, in effect organizing a huge "put" market on American lives. It has the smell of inviting disaster.
In this age of terrorism and weapons of mass destruction consider the bonanza that would accrue to the holders of these "bond instruments" if events conspired to make a massive number of the policies due and payable. Far fetched?
After 9/11, London's The Observer reported on September 23, 2001 that Ernest Welteke, the president of Germany's central bank, the Bundesbank, said a study by the Bundesbank pointed strongly to "terrorism insider trading in the days leading up to this month's carnage in the U.S." Insurance companies' stocks with significant exposure to damage claims fell sharply in the days before the attack. Further there were an unusually large number of put options traded on United Airlines and AMR shortly before the event, among other transactions.
That is what the world of financial markets has bequeathed to us. Not only a failed system of "derivatives" and commodity pricing, but a channel through which the perpetrators of murder and mayhem can manipulate trading exchanges to their profit, and in certain cases to set in motion a chain of events where profit itself becomes the primary motive of events that might otherwise not have come to pass, were there no "trading profit" to be gained.
Only a government and its agencies fitted with rose-colored glasses would permit as perverse a financial instrument as "death bonds" of such lethal potential to gain legitimacy. It would be an act of extraordinary danger and irresponsibility!