The Coming Death Bubble

According to the Merriam-Webster online dictionary, a bubble is a small globule typically hollow and light, a small body of gas within a liquid; a thin film of liquid inflated with air or gas; a globule in a transparent solid; something (as a plastic or inflatable structure) that is hemispherical or semi-cylindrical.

Then there are the darker definitions: something that lacks firmness, solidity, or reality; a delusive scheme; a state of booming economic activity (as in a stock market) that often ends in a sudden collapse.

Tiny bubbles made the late singer Don Ho happy. Lawrence Welk liked tiny bubbles, too. Financial Markets always want more of everything, however, so they prefer big bubbles: the kind that eventually explode into financial disaster for the many, but shower the very few who inflated and carefully manipulated those bubbles with enormous wealth.

In the early 20^th Century, mass manufacturing of innovative products to make them cheaper to buy with easy credit, along with stocks purchases through margin loans offered by brokers, created the first of the century's burst bubbles, resulting in the Great Depression. Then came the Japanese bubble of the 1980s, expanded by deregulated financial markets, relaxed monetary policy, easy credit and low interest rates on an increased money supply that allowed massive financial market speculation in land and corporate profit values until, in May 1989, worried about the unsustainable values of land and stocks, the Japanese government decided to tighten monetary policy through a series of hikes in interest rates. The markets cooled, the bubble burst, recession followed, and the Japanese economy has yet to completely recover.

The big bubble magicians quickly found new prey by creating the infamous “Dot-Com Bubble” at the end of the 20^th century, when new internet companies (the dazzling dot-coms) were funneled huge amounts of low interest loans and venture capital and grew rich from issuing stocks without regard to price to earnings ratios. When it started to become clear that, for many dot-coms, there was no there there, the panic began, the bubble burst and recession followed.

Without taking time to breath, the bubble wizards launched the nuclear bubble triple play: mortgage-backed securities, credit default swaps and collateralized debt obligations. The entire world of today struggles to trudge through the ashes of that global economic tsunami.

And now, according to a September 5, 2009 New York Times report, the biggest investment banks are climbing all over each other to package hundreds or thousands of life insurance policies ill and elderly people sell for more than they would get if cashed it in with the insurer. These banks will then package and resell those bonds (or viaticals) “to investors, like big pension funds, who will receive the payouts when people with the insurance die”. Though the banks continue to pay the premiums for the insured, the amount of profit depends on the timely deaths of those insured: the sooner the deaths the better. If the insured live beyond the cost of premiums to profits ratios, the investors lose money in what is nothing more than betting on timely, thus profitable, death.

Life settlement companies are not new to the death business. They, in fact, were around in the early days of the AIDS epidemic, buying the life insurance policies of cash-strapped AIDs victims. Profits were good until, in the 1980s, new treatments extended the lives of those afflicted, resulting in losses for the gambler investors.

For contemporary death investors, the gamble to risk ratio is no different, the best policies weighed by those most likely to die soon.

According to a June 11, 2009 Economist.com article, “Goldman Sachs, Credit Suisse and Deutsche Bank have built big life-settlement desks—one employs about 100 people. Goldman and Credit Suisse have businesses that buy life-insurance policies from individuals. Deutsche Bank prefers to focus on derivative products. This synthetic market is now said to represent about $6 billion-7 billion, compared with a cash market of about $12 billion.” According to the September 5^th New York Times article, “some in the industry predict the market could reach $500 billion” and “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.”

And with $26 trillion of life insurance policies in force in the United States, (source) the market could be huge.

Sound familiar?

Then there is the dirty little secret of life insurance sellers: the real profit gravy comes from the calculated percentage of insured who, for a variety of reasons—mostly budgetary distress due to loss of job or other reasons for an inability to continue paying the premiums—let these policies lapse. As Wall Street securitization of what would otherwise be abandoned premiums grows, the drop in profits from abandoned and cashed in early policies could severely impact the life insurance industry, resulting in more expensive premiums overall.

And, of course, the new bubble of death is inflating in ignorance or simple disregard of life insurance securitization fraud of recent vintage. American Benefits Services, Inc., offered investors in Texas and other states a 42 percent rate of return, with 15 percent guaranteed. Over 3,000 people invested $117 million. Investor funds collected by American Benefits were forwarded to another viatical (death futures) settlement company, Financial Federated Title & Trust, which spent only $6 million to buy interests in actual life insurance policies. Regulators say the rest was diverted for the personal benefit of company organizers, including the purchase of a helicopter, boats, luxury cars (including four Aston Martins), luxury homes and large salaries. Fraud and investigations of alleged fraud in viaticals have happened in Vermont, Ohio, Maryland and other states. Source: http://www.quatloos.com/viaticals.htm

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