HERE WE GO AGAIN ... BANKING ON DEATH, III

In my book I wrote about dead peasant insurance. It worked something like this. Companies would take out insurance policies on their employees. Those on the lowest rung of the totem pole would be offered a $10-25,000 insurance policy when they were hired. When they died their family would collect the money.

This is where it gets interesting.

What the companies didn't tell their employees is that when they took out policies the policies actually paid out anywhere from $100-300,000, and some times more. But the family members still only received $10-25,000. The companies could do this because of favorable legislation that gave them tax credits (as a business expense) to purchase the insurance policies.

This means that the American taxpayer you and me actually paid for the insurance policies. But the company collected when the "dead peasant" insurance policy paid off.

Nice, huh?

Anyways, we're now seeing the evolution of another death based financial contract. It turns out that Goldman Sachs and the usual suspects on Wall Street want to peddle insurance contracts to pension "investors."

Sound good so far? Not really. Here's why.

Because people are living longer, each additional year of life expectancy adds as much as 4% to future pension requirements. This cuts into profits. Longevity cuts into the bottom line. However, by providing insurance to pensions and other retirement institutions Goldman Sachs hopes to convince the pension groups that they are dumping the expense of each additional life year onto insurance providers.

But here's the catch.

The "insurance" providers are not categorized as insurance companies. As a result the pension insurance system isn't regulated like regular (car, home, etc.) insurance companies. These insurance providers don't have to have the reserves on hand to pay out if something really goes wrong (you know, like in 2008).

Instead, these market players are considered as part of our unregulated derivative and/or "swap" market. Call it the "death derivative" market. But, at the end of the day, they don't legally need to have the money to pay out claims. To be sure, they can collect premiums, and can suck the financial life out of their customers. But, like the economic zombies they're sure to become when the going gets rough, they're not legally obligated to give anything back.
 

 
So, instead of selling insurance Goldman Sachs and other banks are really selling "death derivatives" - which are contracts that derive their value from an underlying asset, and can be bought and sold to others with few if any oversight (similar to an earlier class of "death securities" I wrote about over a year ago).  

In plain language what this means is that if the insurance providers collecting premiums today go belly up tomorrow because more people suddenly die, many pensions who think they have insurance will find themselves facing a shortfall, big time.

Goldman Sachs, and their band of snake oil salesmen, are saying "Don't worry ... private market players know what they're doing ... and besides, insurance companies don't go bust." Huh?

Incredibly, these guys have already forgotten and moved past Lehman Bros. and A.I.G. And why not? They got their money.

We should know better. The motive here isn't insurance. It's revenue. These guys need to be regulated. But they won't be.

It's de javu all over again.

- Mark

THE WALL STREET TAX MAN COMETH (for your home)

When Wall Street found they didn't have the cash to pay off their stupid bets and other financial obligations they ran to Uncle Sam and the American taxpayer for trillions in loans and other guarantees. But when a homeowner finds that they don't have the cash to pay their tax obligations Wall Street has no sympathy.

Put another way, Wall Street got a financial parachute for it's role in the creating the market crash. The homeowner, however, is told to pull himself up by his cement bootstraps.

But wait. It gets even worse. Check this out.

After stabilizing their financial position with a taxpayer funded bailout some of Wall Street's biggest financial institutions have created a new money-making scheme - they are now bidding on the tax debts of strruggling homeowners. If they win the bidding process they then turn around and sell the debt elsewhere.

Making money on homeowner debt is really pretty simple. Here's how it works.

1. Once a financial firm has purchased a tax lien debt of, say, $5,000 Wall Street's finest add interest charges and fees to the debt amount (just like they do with credit card debt).

2. If the homeowner can't pay the new debt amount (of say, $10,000), the financial institution forecloses on the home. This is done rather quickly, especially if the home has equity. This has become extremely easy now with our collapsing foreclosure standards.

3. Once foreclosure happens Wall Street's financial firms then bundle up and sell thousands of these tax debt contracts to investors (as securities), selling or extracting the equity from the house to pay 7-10% interest (and pocketing what remains). 

You know, when people like me said we need to take over struggling banks (instead of stuffing them with trillions of bailout dollars) critics said that this couldn't be done because it was socialism. And besides, we needed to keep banks afloat or else the entire system would sink ...

Tell me, if taking over a troubled bank with mounting debts is called socialism, what should we call taking over a struggling debtor's home who had their tax debt sold out from under them? Lawful racketeering?

 

Just asking ...

- Mark

THE BANKSTERS ... MAKING WILLIE SUTTON PROUD

"Because that's where the money is."

- Famed Bank Robber, Willie Sutton,

responding to a reporter who asked him why he robbed banks.

 

 
Nakedcapitalism's Yves Smith muses about an interesting post from Housingwire.com on foreclosures. It turns out that of all of the housing foreclosures followed by RealtyTrac (one of the 'go to' sources on these things), over 50% of foreclosed homes actually have positive equity. That's right, banks are foreclosing on homes that can be resold at a profit at a higher rate than they're foreclosing on homes that are underwater.

Like famed bank robber Willie Sutton, the banksters are going after homes with equity because "that's where the money is." There's two possible reasons for this.

First, as I've been writing about for a while, it makes no sense for the banks to concentrate on foreclosing on negative equity mortgages because then they have to write-down the value of their assets and their managed portfolios. It especially makes no sense when you consider the banksters understand ...

* You can't claim bonuses, demand higher wages, charge hefty management fees, and then make billion dollar bets if your asset base is declining. Foreclosing only on homes that are underwater damages the asset base.

* New rules allow the banks to use Unicorn math to "reprice" their toxic assets, which artificially inflates the value of their asset base and portfolios (while regulating the market price out of the market). If you don't foreclose on toxic mortgages you can reprice the toxic instrument they are affiliated with.

Second, it's much easier to go after delinquent homeowners with positive equity, where court backlogs aren't so deep, and the outcome is more profitable. As Yves Smith suggests, with foreclosure rates rising in previously "safe" areas like Provo, Utah and Portland, Oregon, the banks seem to be going after the easy money. Because California, Arizona, and Florida have been the hardest hit states there's now a backlog of foreclosure cases there. This means more time in court, for longer periods, in these regions. Foreclosing on homeowners with equity in places like Utah is the industry's low hanging fruit.

And best of all, for the banksters, it's legal.

If you believe in reincarnation, I'm pretty sure where you can find Willie Sutton. He's on Wall Street.

- Mark

BANKING ON DEATH

We all know that part of what drove our economy into a tailspin in 2008 were the incredibly stupid bets market players made. These bets are called credit default swaps. Essentially they are unregulated insurance contracts written and sold by market players who never intended on paying out if things went wrong (primarily because they didn't have the capital on hand).

What the "insurance writers" were really after were the premiums. When the unregulated insurance writers found out that they couldn't pay out on the bets that went bad (like subprime mortgage securities), all financial hell broke loose.

Well, hang on to your hats. It looks like we're going to do this financial stupidity all over again, but on another level. Only this time the big market players are banking on death. Here's how it works.

Traditionally if you purchase a life insurance policy the expectation is that you will pay premiums. In return you have a life insurance policy that can pay anywhere from $100,000 on into the millions. Your family, or your designee, receives a payment upon your death. If you decide you want to cash out, for whatever reason, you cancel the insurance policy and settle with the insurance company. You get a fraction of what you paid into the policy. Most insurance companies anticipate people cashing out, which helps to keep their costs down (since they don't have the big payout at the end). Pretty simple, huh?

Today, however, Wall Street's investment banks want to purchase your life insurance policy and turn it into a security. Specifically, the idea is to get life insurance policy holders to sell their policies to Wall Street. In return the insured party (you, for example) receive a fraction of what you paid into the policy. The new beneficiary of your death are Wall Street market players.

To be sure, Wall Street market players continue making payments on your insurance policy. But instead of waiting for one person to die, what they do is bundle up hundreds, if not thousands, of insurance contracts. These contracts - and the future payouts - are then sold to market players as securities. So you could conceivably have 10,000 life insurance policies wrapped into one security.

What we end up with is a system that creates what economists call "perverse incentives" because of how they encourage the holders of these securities to cheer on your death. Worse, it provides Wall Street and the market players who buy into these securities a financial incentive to oppose national health care initiatives, to stall the release of new medicines, or to hinder medicinal patent sharing proposals. Anything that might prolong your life is viewed as bad news for this security market.

Death is money.

As economists Marshall Aueback and L. Randall Wray put it, we could see the evolution of a powerful alliance where:

Big Pharma and Big Finance might well try to keep new miracle drugs off the market; or, if these drugs were capable of extending life and thereby reducing profits on the securities, make them prohibitively expensive, thus curbing access.

Aueback and Wray add that it's "fairly easy to see some profitable synergies developing between financial firms marketing bets on death and health insurers opposed to universal, single-payer health care."

By keeping health insurance policies alive the securitization of death could bankrupt the insurance industry. Keep in mind that insurance companies have traditionally banked on policy holders canceling their policies long before they pass on. Keeping policies alive for Wall Street undermines this approach.

Or, Wall Street could do an end run around the insurance industry - as they did with credit default swaps - and create securities with the sole purpose of purchasing insurance policies. Another unregulated market, with a focus on encouraging death. Great.

Apart from the financial issues involved, there are also the ethical ones (which I discussed with reference to Dead Peasant Insurance in my book). Should we allow market players to literally bank on death in a way that might encourage them to oppose the release of medicines and public policies that make our lives healthier?

In my view, markets should neither encourage nor cheer on death. Like Dead Peasant Insurance, banking on death through the creation of death securities is not an industry that needs to be encouraged.

- Mark

Post Script: Here's a video with some interestings numbers on death.

FINANCIAL GHOULS

Now this is just wrong. From the NY Times:

Dead people are the newest frontier in debt collecting, and one of the healthiest parts of the industry . . . Improved database technology is making it easier to discover when estates are opened in the country’s 3,000 probate courts, giving collectors an opportunity to file timely claims. But if there is no formal estate and thus nothing to file against, the human touch comes into play . . .

Specifically, new hires at the company at the forefront of this growing debt collecting approach, DCM Services, are trained for three weeks in what the company calls “empathic active listening.” Their tactics are clear. “You get to be the person who cares,” according to training manager, Autumn Boomgaarden.

But caring is not the only tactic employed by DCM Services. They also prey on the next of kin's sense of spiritual responsibility for their dearly departed. As Michael Ginsberg of Kaulkin Ginsberg, a consulting company to the debt collection industry put it:

"... we want the dead to rest easy, knowing their obligations are taken care of ..."

Where do I begin ...

You know, there was a time when the Catholic Church preyed on the emotional and spiritual weaknesses of the poor to induce payments to save the souls of the dearly departed. The payments were called indulgences. But they were also considered so vile and ghoulish that they helped create the conditions for the Protestant Reformation that brought brutal wars, and changed Europe forever.

- Mark

P.S. In the FYI category: In most states the next of kin are not legally responsible for any of the bills of the deceased.