With the home mortgage crisis dragging along, consumer borrowing still lagging, and crises looming in other sectors like commercial real estate, Wall Street is desperate for a new product to kick-start securities markets.
It appears as though the savior may be riding in on a pale horse.
According to a September 5 New York Times article, banks like Credit Suisse and Goldman Sachs are exploring new investment schemes that involve buying up life insurance policies from sick and elderly people, bundling them into huge securities, and selling shares in the securities to investors.
Buying shares is essentially a bet–that the people whose insurance policies on which the securities are based will die “on time” or earlier than expected. According to the Times, “The earlier the policyholder dies, the bigger the return–though if people live longer than expected, investors could get poor returns or even lose money.”
Just when it seemed impossible for Wall Street–still counting the trillions in taxpayer dollars it received in a government bailout to save it from collapse–to sink any lower, greed came to the rescue with the development of a grim new market.
As Karl Marx and Frederick Engels wrote in the Communist Manifesto, “The need of a constantly expanding market for its products chases the bourgeoisie over the whole surface of the globe. It must nestle everywhere, settle everywhere, establish connections everywhere.”
Now, the financial crisis has driven capitalists to the nursing and retirement homes, and to the bedsides of the sick and dying.
The credit rating agency DBRS–whose Senior Vice President Kathleen Tillwitz informed the Times that “our phones have been ringing off the hook with inquiries”–is studying how to rate pools of life insurance policies. The main challenge is figuring out how to pool people together. As the Times wrote:
The solution? A bond made up of life settlements would ideally have policies from people with a range of diseases–leukemia, lung cancer, heart disease, breast cancer, diabetes, Alzheimer’s. That is because if too many people with leukemia are in the securitization portfolio, and a cure is developed, the value of the bond would plummet.
If the sub-prime mortgage market boom is any indication, an increased demand for existing life insurance policies spurred by increased securitization would lead to widespread abuse and fraud–with policy originators faced with the same incentives that encouraged mortgage brokers to deceive borrowers with “teaser” interest rates that ballooned several years into repayment.
In this case, the victims would be the elderly, the sick, and those who depend on life insurance benefit payouts in the case of the death of a loved one.
A further element of instability would be added if life insurance-backed securities take off–the likely proliferation of illegal “stranger-owned life insurance” or “STOLI” policies.
A STOLI is a policy created when a broker or investor convinces someone, usually a senior citizen, to take out a life insurance policy, with the promise to sell it quickly for a one-time payment. According to Reuters, “The death benefits are immediately transferred to investors, usually hedge funds.”
The securitization of life insurance policies would likely lead to an increase in the number of illegal STOLIs, once the banks exhaust the possibilities of buying up existing, legitimate policies to package into securities. In turn, insurance companies would have an incentive to crack down on this practice to avoid paying death benefits to the investors, leaving the market prone to crisis.
Other challenges for a credit rating agency like DBRS include figuring out what “would happen if health reform passed, for example, and better care for a large number of Americans meant that people generally started living longer? Or if a magic-bullet cure for all types of cancer was developed?” These eventualities, while prolonging and improving the lives of millions, would be bad for investors’ bottom line.
The “potential risk for investors,” the Times continued, is that “some people could live far longer than expected. It is not just a hypothetical risk. That is what happened in the 1980s, when new treatments prolonged the life of AIDS patients. Investors who bought their policies on the expectation that the most victims would die within two years ended up losing money.”
According to an ABC News story:
The industry for selling life insurance [policies to investors] first sprang up during the AIDS epidemic of the late 1980s. “Companies loved AIDS because it was a predictable death sentence,” says Gloria Wolk, a life-settlement expert who learned about the practice while volunteering at AIDS services clinics. “The shorter and more certain the life expectancy, the higher the returns promised to investors and the greater the lump sum offered to patients. It was a grim mix of free-market capitalism and human mortality.”
Wolk nevertheless said she “saw the industry make a huge difference in the lives of terminally ill patients and their families”–by providing victims with funds to pay for the exorbitant health care and other costs associated with dying from AIDS, while it was ignored by a government run by Ronald Reagan.
The only conceivable defense of the practice of bundling life insurance policies into securities and selling them to investors to profit from the deaths of policyholders is that it enables those who sell their policies to get more than they would if they simply sold policies back to the insurance company.
But this option is only attractive because health care costs in the U.S. place quality care out of reach–for the nearly 50 million people without health insurance, and for tens of millions more who are insured, but can’t afford the co-pays and deductibles that pile up when they get sick or injured.
Similarly, for the elderly whose retirement savings have been eroded by the current crisis, the inadequacy of Social Security, and by the long-term shift from defined-benefit pension plans to 401(k)s based on the stock market, the main reason most would be tempted to sell their life insurance policies is that our government neglects to provide a decent standard of living for elderly workers who have outlived their usefulness to the exploiting class.
In other words, the market for securities backed by life insurance policies depends on the absence of universal single-payer health care for all and the lack of a sufficient social safety net for senior citizens.
Almost as disturbing as first-tier financial institutions betting on death is the matter-of-fact reporting of the New York Times.
The Times article, titled “Wall Street Pursues Profit in Bundles of Life Insurance,” ignores completely the question of the morality of human beings gambling on the lives of others, indexing the sick based on the nature of their affliction and when it is likely to kill them, and crossing their fingers that no cure for cancer is discovered. This is a brilliant illustration of Marx’s assertion that capitalism “has left no other bond between [people] than naked self-interest, than callous “cash payment.”"
It says a lot about capitalist society’s brutality and indifference to human life that the newspaper of record could cover this story without pause, going no deeper than the pros and cons from the perspective of investors–while “Ads by Google” accompany the story, inviting readers to “sell your life insurance policy” and “find low cost life insurance.”
Nor does the Times question the logic of devoting massive wealth to a market that creates no new value in the form of goods or services, and is of no use to anyone but the few who will profit from it.
According to the Times article, there are $26 trillion in life insurance policies in the U.S, and “some in the industry predict the market [for life-insurance-backed securities] could reach $500 billion.” That sum is nearly three times the total of all the budget shortfalls of every state government for fiscal year 2010.
A just society based on human need would use that $500 billion to preserve and expand essential services that are on the chopping block as states balance their budgets.
A just society based on human need would devote those resources not to betting on death, but providing top quality care to the sick, researching new cures and treatments (and making them available to all), and ensuring that the elderly live the last years of their lives in dignity and security.
According to the economic “experts,” the U.S. economy is beginning to “recover.” But the very nature of the recovery–a return to big bonuses and salaries for Wall Street executives alongside deepening and sustained unemployment, cuts in social services and health care “reform” that amounts to a massive government handout to the health insurance industry–demolishes any idea that the U.S. is not a class society.
It is time to build the socialist alternative. Our lives and dignity depend on it.