Sunday, 6 September 2009

Will Wall Street Finally Meet Its Waterloo?

That thought at least ran through my head this morning when I read this in the Times: "Wall Street Pursues Profit in Bundles of Life Insurance." It's a ghoulish little activity -- I use "ghoulish" with full intent, as the word derives from the practice of plundering graves for profit. Which, I imagine, could very well be Wall Street's next stop: buying up cemeteries, then disinterring the bodies and yanking gold and diamond rings off bony fingers, tossing teeth that have inlaid gold or silver into a bucket to be melted down, rummaging the corpses with a cold eye for any items of value ... But I digress.

The NYT explains the business at hand quite succinctly:
The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.

Well, death is recession proof. Everyone's gonna die. Now if you can identify the sickest members of society, who are also most desperate for quick cash, you can probably score some pretty nifty returns.

So get a load of this: You're Wall Street, pretty much universally despised by average Americans for having played a key role in precipitating a financial crisis of epic proportions, one that's pushing unemployment up into double digits. An impartial observer might assume that you'd be in duck-and-cover mode right now, trying to keep a low profile so that your CEOs and friends don't end up swinging from the lamp posts, but actually, that's not the Wall Street way.

You don't lose your bluster at all. You've got Washington politicians and officials licking out of your hand, throwing bailout money at you. You've got the Federal Reserve backstopping you by allowing you to borrow cheaply using crap assets as collateral. Why try to be humble? You rev up the bonus machine again; how can you keep all this talent that almost bankrupted you if you don't pay industry-competitive bonuses? You wade back into the deep end of the risk pool, as Goldman Sachs has done. You even return to bundling and selling the same kind of junky securities that got you into this mess. And now you figure out a way to create a money machine by cashing in on the sickest and most defenseless members of society.

Sometimes I wonder if Wall Street banks actually think about their image. Because this has to look just absolutely horrible. I mean, there's not much that would look worse, short of profit-making euthanasia squads that roam the land.

Which brings me to: Might this be Wall Street's Waterloo? One of these days, the big investment banks are going to push things too far. Could this be the moment? Americans aren't terribly bright -- one out of five thinks the sun revolves around the earth -- but there are simple acts that everyone can understand and becomes enraged about, such as the bonus culture on Wall Street. Everyone on Main Street who collects a paycheck can easily figure out that he earns only a fraction of what the average Goldman Sachs banker will take home in bonus this year.

Up to now, the life settlement business has always operated on the fringes. It seems a bit ghoulish in any context, but reasonably, it's done some good, helping people who are, say, terminally ill get a little spending cash for their final days.

But if Wall Street turns life settlement into a profit center, that will change. A large-scale, organized business will result in life insurance rates being jacked up for the rest of America, because insurers now count on a certain percentage of policies to lapse through a failure to pay. Here's the problem: Wall Street banks won't miss a $200 monthly payment on Aunt Clara's life insurance policy if they're sure she's going to croak in a year or two and they can collect $100,000 or so. Fewer policies will lapse, and because of this, insurers' payouts will rise. And they'll compensate by charging all of us more.

But beyond this, I have to wonder if Wall Street bankers really thought this one out. Sure, there's money to be made, probably good money. But this is a public relations nightmare in the making. Can the Street really be this tone deaf?