Life Settlements Update: "investors are looking for the individuals most likely to die"

Yesterday I posted about Wall Street's proposal to securitize "life settlements." If you haven't read that post yet, you can find it by clicking here. The post got a huge response. In fact, the initial New York Times article got media attention from around the world. Its pretty clear that this is an issue that resonates strongly with the public. People are angry. Righteously so, in my opinion.

Since this is an issue many of you clearly care about, I thought I would dig deeper and bring you readers some more information.

Some readers pointed out that the concept of "life settlements" isn't new. That's true. They've actually been around since the early part of the 20th century. For most of their history they were known as "viatical settlements."[1] Historically, these kind of settlements were mostly engaged in by "high networth" (read: rich) elderly individuals who were fairly certain they only had a few years of life left (for more on how viatical settlements transformed into the modern form of life settlements, keep reading below). However, we shouldn't dismiss the story just because the concept isn't new. There are a few factors that make this story worthy of people's attention:

(a) Some banks are clearly planning on transforming this into a big business. The New York Times quotes an estimate that states that the market for this type of financial product could grow to $500 billion [2]. The Economist estimates that the market currently stands at about $18-19 billion.[3]

(b)The proposal is to securitize these life settlements into CDO-like securities. Thats the same business model that was used to transform subprime mortages into securities. That ended horribly. Why is Wall Street so insistent on following a business model that has failed so dramatically in the recent past?

(c)Lets look at who is behind this proposal. The New York Times article points to a Jan Buckler at a firm called DBRS as one of the pioneers in life settlement risk management.[2] If we look at Jan Buckler's LinkedIn.com page, [4] we see that she worked for Bear Stearns from 1999 to 2007. The article also points to an individual named Andrew Terrell, who was in charge of Bear Stearn's longetivity and mortality desk, as a major proponent of the idea. Most readers will know that Bear Stearn's was one of the first bank casualties of the recession. These are only two individuals, a tiny fraction of the total number involved in this "industry." However, this illustrates a point: do you trust people who worked for failed banks (that were driven into the ground because of their greed) to employ a business model that has failed dramatically over the past few years to package and trade securities which make it in the investor's interest for an innocent human being to die as fast as possible? Thats a serious question because a lot of the financial media is reporting that this whole proposal is no big deal and they don't understand what the fuss is about.

(d) This idea is being proposed in the middle of a brutal recession that is leaving lots of people out of work and desperate. Wall Street says financial agreements like this help those people make ends meet. Others would say this is just a new way for Wall Street to make a buck off people in one of their weakest and most vulnerable moments.

(e) This idea is being proposed at a time when many seniors are already worried about the proposals for nationalized health care and are suspicious about the possible existence of so-called "death panels" that might refuse healthcare in one form or another to the elderly or very sick. Here, we're talking about a proposal that explicitly puts it in the interest of banks and investors for the elderly and very sick to die as fast as possible. I'm not one for conspiracy theories but even I can't avoid mentioning the fact that Goldman Sachs (which is one of the banks lining up behind this proposal) has a lot of ties to the current administration. Make of that what you will.

Okay, a lot of that was reiterating some of what I said yesterday. I apologize for that but I thought it was necessary to point out why this story isn't just ho-hum or driven by paranoia.

Elsewhere, NJ.com (out of New Jersey) published an article [5] on the topic on Sunday (September 6th). This is the part where I explain how viatical settlements became life settlements. The article states:

The life settlement business grew out of the AIDS crisis of the 1980s. In what were called viatical settlements, people living with AIDS sold their unwanted life insurance policies for sold their unwanted life insurance policies for cash they often used to cover medications or treatments.

As medical breakthroughs extended the lives of many people with AIDS, the industry shifted its focus from the terminally ill and toward seniors in their mid-60s or older, said Scott Gibson, of Lewis and Ellis, an actuarial consulting firm in Richardson.

Part of the reason why the name changed was because viatical statements had gotten a bad rap with both the public (over fraud issues, more on that later) and with investors (because those darn scientists created life-saving medications that allowed people to live longer, cutting into investor profits, dang!). But there was also something of a business model change. When people dying of AIDS could not longer produce a profit for them, investors had to go out looking for new people to buy policies from. I mean, seriously, re-read the above quote and tell me that doesn't sound predatory!

And then theres this beauty:

Seniors also need to understand that their medical records will be examined as part of the sales and that the buyers of their policies will occasionally check on them to determine when to collect the death benefits, she said.

"In this buyers' market, investors are looking for the individuals most likely to die," said Stephan Leimberg, editor of Tools and Techniques of Life Settlement Planning. "They want you old and ripe. That way, they'll pay the fewest premiums and get the best return on their investment."

The bold emphasis was added by me. I'm going to guess that there was some sarcasm intended there, but still ... this is the guy who writes a major industry publication in the world of life settlements and hes joking like this? I thought people should read that.

And, isn't that great? If you enter into of these contracts, you apparently waiver some of your rights to medical privacy and the investors get to periodically check on your health just to see how close to death you really are. Yeah, no potential for abuse there ...

Politics is also involved here. If you follow this link [6] to a blog that focuses on life settlement news, you'll see that, in one week, Connecticut, New York, California and Ohio all considered (or approved) legislation that would normalize and regulate the life settlements business in their respective states. Of course, New York, Connecticut and California alone contain a big chunk of the financial services industry of the United States. On October 8th, 2008, Credit Suisse Life Settlements LLC obstained approval to buy life insurance policies in Florida and Puerto Rico. [7] This brought their total tally to 45 jurisdictions (43 states + D.C. + Puerto Rico). This is what I found in a very quick, basic online search. I'm sure someone with more experience and understanding of the legal and political world could present a more complete picture.

Still reading? Good! I'll end this post with a reference to an article from BusinessWeek published in July of 2007.[8] First of all, BusinessWeek reminds us of the massive potential for fraud:

It all sounds great, except that many of the life settlements that Wall Street firms are buying fall into categories ranging from sketchy to toxic. "They are creating a very risky product," says Janet Tavakoli, a Chicago financial consultant who specializes in advising clients on asset-backed investments. "They may be planning to sell them to sophisticated investors, but they could be roping in people who don't appreciate the risk."

Many life settlement providers, for example, are trying to lure people who don't even hold insurance. In this tail-wagging-the-dog scenario, speculators take out policies on the individuals' behalf, pay them something up front, cover the premiums, and then wait for the people to die so they can collect. At the most outlandish extreme, one outfit devised a plan involving the population of the Federation of St. Kitts and Nevis in the Caribbean.

Investors, meanwhile, have been burned by operators who have misrepresented the profit potential on deals. Two men now awaiting trial in California hatched an allegedly fraudulent scheme aimed at the entire congregation of a black church in South Central Los Angeles. They promised investors 25% annual returns because African Americans die earlier than other racial groups—an ugly pitch that prosecutors say overstated the upside potential.

Bold emphasis added by me.

That didn't discourage the high-powered guests at the New York conference, though. As they tossed back cocktails and dined on pan-seared filet mignon, they enthused about the market's possibilities. "Wall Street firms are here because they know this is an asset class that isn't going away," says David C. Dorr, president and CEO of Life-Exchange Inc. (LFXG), an electronic platform for trading life settlements. "There's big potential.

No. No, I am not making this stuff up. The potential for absurd levels of fraud. Greedy investors targetting black people because they statistically die earlier. Rich people eating filet mignon while they toast their future successes earning profits off of the deaths of the elderly and chronically sick. What more can I really say? What more do I really have to say? I think this all speaks for itself. You *really* should read that BusinessWeek article, it'll surprise you.

Sources:
1: http://dictionary.reference.com/browse/viatical+statement?jss=0
2:http://www.nytimes.com/2009/09/06/business/06insurance.html
3:http://www.economist.com/businessfinance/displayStory.cfm?story_id=13832179
4:http://www.linkedin.com/pub/jan-buckler/8/209/8ab
5:http://www.nj.com/business/index.ssf/2009/09/seniors_raise_cash_by_tapping.html
6:http://lifesettlements.dealflowmedia.com/wires/060908.cfm
7:http://www.pr-inside.com/credit-suisse-obtains-life-settlement-licenses-r850769.htm
8:http://www.businessweek.com/magazine/content/07_31/b4044001.htm

Job Growth (?)

I want to draw your attention to this article from the New York Times. And specifically to this graphic. The Times writes that:

FOR the first time since the Depression, the American economy has added virtually no jobs in the private sector over a 10-year period. The total number of jobs has grown a bit, but that is only because of government hiring.

The accompanying charts show the job performance from July 1999, when the economy was booming and companies were complaining about how hard it was to find workers, through July of this year, when the economy was mired in the deepest and longest recession since World War II. For the decade, there was a net gain of 121,000 private sector jobs, according to the survey of employers conducted each month by the Bureau of Labor Statistics. In an economy with 109 million such jobs, that indicated an annual growth rate for the 10 years of 0.01 percent.

This reveals more about the state of the real economy than any stock index or analyst opinion does. Without jobs there are no consumers, and without consumers there is, in effect, no American economy. Now, of course, there are jobs out there. But with unemployment reaching towards 10% nationally and closing in on 20% in some particular areas, its clear that finding a job is a much harder venture than it was a few years ago.

One comment in the article which I found interesting was:

Hard as it may be to believe, the consumer economy of the United States actually lost retail jobs over the decade, at a rate of 0.2 percent. There were fewer people working in food stores. But the category of general merchandise stores — like Wal-Mart and Costco — showed an impressive gain of 1 percent a year, even though the category also includes department stores like Macy’s, where the number of jobs has fallen.

So even retail, one of the supposed bright spots of the economy, suffered in this decade.

If you look at the graphic, you'll see that the two economic sub-sectors which exhibited the greatest growth were 'Management & technical consulting' as well as 'Home health care.' I'd like to go more in-depth into each of these industries later. Needless to say, I'm skeptical that they will be drivers of economic growth.

In recent memory, one of the primary reasons that management consultants have been hired by corporations is to and fire and downsize. With smaller operating budgets during this recession, I wouldn't be surprised if the use of management consulting declines overall.

Secondly, when it comes to home health care nothing is a 'given.' I keep hearing people trot out facts about the aging boomer population and how they'll need home health care in the near future. Yes, there will be a lot of elderly people in the United States. There are many elderly people around the world, however, and not all of them receive commercialized care (or government care, for that matter). Most are taken care of by their families. If there is no money to pay for commercial home health care, it doesn't matter how many old people you have. Lets just take a look at a few factors:
1. The incredible wealth-destruction that many retirement accounts have been subject to during this recession.
2. The incredible debt load future generations will carry.
3. The dismal jobs situation in the United States.
With these three conditions in mind, how can we be so sure that health care will continue to grow at such a rapid rate and be a job-creator? In my opinion, we can't.

Thus, I see the New York Times job report as being all-around dismal.