Volatility

September 6, 2009

Collateral Death Obligations

I first read about this yesterday, and I’ve been doing a slow boil over it ever since.
 
DBRS, a financial company, has a new “innovation” in the works, called “life settlement”. Sounds like some new kind of hippie commune, right? Not quite.
 
They want to buy up life insurance policies from the sick, the elderly, the destitute, the desperate, at lowball prices. They’re going to slice and dice them and securitize them. The security holders will continue paying the premiums. Their profit will be the function of a quick death for the “underlying”.
 
This is only a ghoulish new level of the same parasitic casino capitalism which has long been imposing a huge tax on the economy and society, has contributed nothing to the economy or society, and which has now crashed the economy. But they need never have feared any consequences from society for their capital crimes against it.
 
On the contrary, the treasonous government, guided by (cheaply) bought and paid for enemies of the people, has been the FIRE sector’s tool for seizing the biggest opportunity for disaster capitalism yet. They’ve been completely bailed out. Not only have they had all their losses socialized, but Bush and Obama have even seen to it that all their projected profits which they were standing to lose were made good. (For example, Goldman Sachs not only had its AIG ante bailed out; its bet was paid out in full as well.)
 
And now that they’ve been made whole, and now that as far as the Obama administration, Congress, and the MSM go the political coast is clear, it’s time to blow up the next bubble. From here on the pattern, already in place since the 80s, is as clear as day. Boom and bust, bubble and crash. Rent-seeking on the way up, disaster capitalism on the way down. Turn society into a casino, play the high roller with house money while crooked dealers ensure the house always loses while letting you play on credit. And then, when your biggest bet finally does fail, the house not only forgives it, but pays off as if you had won anyway.
 
Who pays for all this? The slaves who must toil to keep the roulette wheel spinning and the lights flashing and the showgirls dancing.
 
So today the finance, insurance, and real estate sector (FIRE) are looking around for ways to blow up another bubble, impose new taxes on the real economy, in order to rake in cash they won’t have to work for.
 
Any new securitization “innovation” will fit the bill. Today it’s life insurance.
 
As for how bubbles get blown, we’re all very familiar with that by now. Make bets on the price of an underlying asset. In this case the “cash flow” is a little different. Instead of flowing in like to an MBS holder, it’ll be flowing out as the holders of the collateral death obligations must keep paying the premiums.
 
But that’s a price worth paying, because this underlying asset is a bet guaranteed to pay off. The policy-holder will die.
 
(Here insert black humor about ways they might seek to hasten the process. It’s really not unprecedented;  
there was a notorious incident in Rome during the Renaissance where a doctor was in cahoots with a priest. The priest was aware of the wealth of some of the sick or injured. In some cases he encouraged people to go to that particular hospital. There the doctor would poison them. The priest would personally administer last rites, together they’d seem on the up and up, and meanwhile they’d manage to loot most of the patient’s money. That doctor was also in the habit of going out early in the morning with a crossbow, shooting passers-by in order to rob them.
 
Since that’s the moral caliber of the people we’re dealing with here, I suppose if they could see a practical way, they’d seriously consider it.)
 
Since the premiums are actuarially calibrated to ensure the insurers a certain profit level, based on the premiums they’ll receive versus the benefits they’ll pay out, since the death derivative holders will only be paying a portion of these premiums (on policies where much of that cost was already paid), collecting the full benefit will be a big windfall to them.
 
So we see the typical parasite activity of the finance sector. It produces nothing, contributes nothing, innovates nothing, adds nothing of social value, but simply “innovates” ways to manipulate the money-transferring activities of the real society, in order to mine society, to collect rents, to reap windfalls while doing no work. There have never been worse useless eaters.
 
This leads to the tax they impose. As Yves Smith wrote at Naked Capitalism, these premiums have priced into them the expectation that many policyholders, for one reason or another, will let the policy lapse before it ever pays out the full benefit. In particular policyholders fallen upon hard financial times are likely to do so.
 
But if they can instead sell their policies at pennies on the dollar to Wall St outfits like DBRS, the security holders will certainly continue to pay the premiums (after all, they’re using taxpayer dollars) until “maturity”.
 
If this becomes widespread, if many policies are subject to it, it’ll wreck the actuarial calibrations. In order for the life insurers to maintain their profit, they’ll have to raise premiums on everyone.
 
So just as any decent human being who wanted to buy a home for his family had to pay a whopping tax imposed by parasite MBS holders and house flippers, so anyone who buys life insurance wanting to provide for his children will have to pay this obscene tax to support these obscene people.
 
Why do we tolerate this? And why do we tolerate politicians who allow this to continue? Even if you ever believed the bailouts were necessary to save civilization, even if you think some of the financial “innovations” were actually worthwhile, by now isn’t it long past time to stand athwart the road of financialization and say “Stop. That’s enough of your innovation. There have been enough of your instruments. We had to bail you out, and that’s bad enough. We’re at least going to prevent you from continuing to play the same games.”
 
That America’s governing officials have not only failed to do this but have rolled out the red carpet for yet another, bigger, more disgusting round of games, is not any sort of normal corruption and capture. It is treason. 
 
Then there’s the sheer aesthetics of this. How ugly is it, how repulsive, to watch those who have already become rich as leeches and as thieves and as looters of the public treasury, now seeking ways to become professional vultures, preying upon the sick, the dying, the frightened, the desolate. How horrible is it to have to live in a world where we must endure the very sight of these wretched, vile criminals?
 
When you go about your day this week, picture this. As you drive to work, as you walk into the building, as you go to get something for lunch, as you run errands, as you head home, picture several times a day having to pass through a tollbooth. The tollbooth is not there for any reason; it’s not collecting for any service being provided, any infrastructure being maintained. It’s just there, because some lazy crook wants something for nothing, and his political friends have let him set up a toll booth. And you have to pass through it, and in order to pass through it you have to pay $5, $10, $20, whatever. (It keeps going up.)
 
Picture having to pass through and pay the toll several times a day. That’s exactly the kind of tax the finance sector is imposing on America. That’s exactly the kind of tax we’re all paying.
 
We’re going to continue to pay it for as long as we submit. Is there still time and space for decent, moderate people to come to their senses, rouse themselves, put a stop to the crimes, arrest the criminals, and put them in prison where any moderate would think they belong?
 
It’s either that, or submit to serfdom. At which point the only way to regain our freedom will be to root out the malefactors with fire and sword.    
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7 Comments

  1. what you’re forgetting is that the poor person who needs the money in the first place is going to get a lot more money when he sells the policy in a more efficient way ( in a securitized product) rather than getting flat out robber by his insurance company.

    So the policy holder gets a big plus, and, offsetting that, there is the potential for a slight increase in everyone else’s rate. It’s called socialism! redistribution of wealth!

    my point is that as long as life insurance policies can be settled, I’d rather have them settled efficiently, instead of having the
    “Settler” get fleeced by the insurance company

    Comment by Kid Dynamite — September 6, 2009 @ 8:27 am

  2. Hi Kid D,

    You think what securitization has wrought so far is efficient? And that things will be different in the future.

    And let’s say the bundler company could offer one cent more for the settlement than the insurer would. Why would it pay two cents? So I can’t imagine where “a lot of money” comes in.

    Meanwhile the increase in everyone else’s rate is pure theft from third parties external to the transaction. You’re right, it is “redistribution of wealth”, upward, to useless parasites.

    Comment by Russ — September 6, 2009 @ 9:14 am

    • to answer your question of why the bundler would pay 2 more cents when it could pay 1 more cent: that’s how competitive markets work! YOU might try to steal a deal by paying 1 cent more, but i know it’s worth $500 more, so i’ll pay $50 more. Of course, my friend also knows it’s worth $500 more, so he’ll pay $100 more, etc etc until you get to a fair value. or at least a “FAIRER” value

      Comment by Kid Dynamite — September 6, 2009 @ 12:24 pm

  3. no no no! it’s redistribution of wealth to the seller of the policy! the poor old person! now, what’s interesting about my views on this is that i’m certainly a fiscal conservative, but i guess my free markets sense overrides my fiscal conservatism here. I haven’t read any of your other posts – you seem to be a fiscal conservative too, which is fine, but this topic is interesting because I feel like lots of liberals will protest,ironically, not realizing that this is a typical liberal redistribution of wealth (if indeed it results in higher insurance costs for everyone else)

    securitization alone does not guarantee things are efficient, obviously, but they are much more efficient than if Ethel gets robbed by the insurance company – I wrote my own blog post about it this morning.

    an aside – the problem is not and never has been securitization – the problem is the ignorance of risk and the massive LEVERAGE that combined to cause disaster with the MBS market. Life insurance products are almost certainly much less risky because everyone will die eventually!

    Comment by Kid Dynamite — September 6, 2009 @ 12:23 pm

    • I suppose I could have been a fiscal conservative if I’d been born into a world where anyone was sane about money, but since that’s not the case in this madhouse, to claim to be a fiscal conservative (no doubt while still supporting wars and astronomical Pentagon budgets) seems to be like going around complaining about gravity, since you can accomplish just as much either way.

      While I’m also no liberal (which means simply being moderately Right economically rather than extreme Right), they would be right in finding your argument, that conveying this loot from the real economy to Wall St is somehow “liberal” in the sense they claim to be (i.e leftist), to be simply bizarre.

      (Though I do agree that in practice “liberals” like Clinton and Obama support such things with great gusto. But that just means they’re corporatists and not economic leftists.)

      As for the insurance companies, turning life insurance into yet another “instrument” was malign, inefficient, and non-innovative in the first place.

      So the answer is not to keep building new layers on top of the Tower of Babel of crime, but to knock down the infamous thing.

      Comment by Russ — September 6, 2009 @ 5:45 pm

  4. obama antichrist

    Comment by Geir (Gerhardt) Smith — September 6, 2009 @ 2:02 pm

    • I should probably delete that as non-responsive, an armpit noise, but I haven’t had enough comments yet to have a “policy”, so I’m really not sure.

      Some blogs leave stuff like that in, some don’t. And then some do different things based on the politics of what it says.

      This is the same thing as “Obama Rocks”, after all. I don’t agree with either (if only because there’s no such thing as an “antichrist”). 🙂

      Oh well, just some meta-blog musing…

      I’ll worry about it once I have LOTS of commenters!

      Comment by Russ — September 6, 2009 @ 5:52 pm


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