Securitizing Death: Wall Street’s Latest Get-Rich-Quick Scheme

You have to give it to those masters-of-the-universe types on Wall Street. Just a little over a year ago, those gurus introduced a whole slew of words into our daily lexicon that have become the equivalent of cusswords.

These were the people who pushed the world economy to the edge of the abyss. Although the jury is still out, and much damage has been done, fortunately we were not pushed into the abyss. At least not yet.

Just when you thought it might be safe, these same goons have cooked up another scheme so bizarre that it makes you wonder just what they’re thinking.

Before I tell you about their latest scheme, it is worth rehashing in laymen’s terms what brought us to the situation we now find ourselves in.

It all started with sub-prime loans offered up by happy-smiling mortgage brokers. For those who have forgotten, allow me to translate: sub-prime means bad credit or inadequate income. And mortgage brokers make used car salesman look respectable.

In the old days, the late 20th century that is, these sub-prime loans were rarely made, and when they were, the lenders usually closely monitored the loans and held on to them for the duration. For that matter, that sort of conservative lending was for just about all home loans.


This sort of conservative lending ensured a stable environment for both the lender and the borrower. It also meant less profit for the lender, and that is where the problem began.

What to do? Well some too-clever-for-their-own-good schemers on Wall Street hatched the granddaddy of all schemes. It went something like this: combine all these questionable loans that made their way to market in one giant pool of bad loans.

To make them more palatable, get a well-respected rating agency, say Standard & Poors, to give them their highest rating. Now just go sell them to retirement funds, investment trusts, and the key to the whole scheme, other governments.

And just for grins, let’s allow some too-big-to-fail insurance company to create side bets like a two-bit hustler at your local bar does on whether or not these “highly rated” financial instruments will fail or not and to disguise these bets by slapping a technical sounding name on them, such as credit default swaps.

Once reality set in and the sub-prime borrowers started to default, the whole house of cards started to collapse, and everyone who made the side bets wanted their piece of the action, too. It is easy to point your finger at the schnook borrower, but there is a whole lot of blame to go around.

You could start with the Security Exchange Commission (SEC) for not regulating these institutions, The Federal Reserve, Fannie Mae, Freddie Mac and politicians of every stripe from the president on down to the local dog catcher encouraging easy-money loans. It seems that Wall Street was lining the pockets of every politician.

All of this brings us to Wall Street’s latest scheme, and I must say that they have outdone themselves on this one, not only for its shear audacity, but its ghoulishness. According to several mainstream media outlets, including the New York Times, Wall Street is putting the finishing touches on plans to securitize death in much the same way the sub-prime loan lenders did.

With the sub-prime piggy bank broken, investment bankers like Goldman Sachs and Credit Suisse plan on buying up life insurance policies, packaging them together and then reselling them as so-called “life settlement” bonds.

Sound familiar?

It goes something like this. A broker approaches a $1 million life insurance policyholder and offers them, say $200,000 cash. The prime candidate is a policyholder who has some sort of major financial problem and is in need of quick cash.

For the buyers, they simply need the perfect prey … oops … I mean prospect for the right type of client. That ideal client is someone with leukemia, diabetes, various types of high mortality cancers or heart disease. The closer the policyholders are to death, the more they want to talk to you.

You can almost hear the used car salesman like pitch now: “Say, Mr. Jones, what would it take to get you in this coffin today?”

This is no small market, either, as it is estimated that there are $26 trillion of life insurance policies in force in the United States alone. Even tapping into a small portion of this represents billions of dollars, and more importantly, a lot of bonus money for Wall Street.

But wait, there could be some problems. What happens if all these sick people are the beneficiaries of some sudden miraculous medical discovery? What if a cancer vaccine is developed?

What happens if we all simply live longer because now we have access to a universal health care system that promotes healthy lifestyles, regular checkups and preventive medicine?

Of course, there are lots of financial risks for the purchasers of these policies. The biggest is that they continue to pay the premiums as those sick people refuse to go away quickly.

It doesn’t take much imagination to see the broad implication of securitizing death. Would Wall Street try to encourage health policies that don’t extend life? Will credit default swaps like side bets be sold? What happens when people live longer and the bonds become upside down? Will the government step in to prevent the collapse of the death bond market?

Crazy as it sounds, maybe Sarah Palin was on to something!