Thursday, October 1, 2009

Wall Street's New Halloween Trick

Halloween is still a month away, but ghouls, ghosts and other grotesque creatures are already roaming America's streets, possibly preparing to knock at your door. What makes them so scream-out-loud horrifying is that they are the newly issued spawn of — shriek! — Wall Street.

The very same greed-fueled bankers who brought us the disaster of 2008's financial crash have created another exotic financial horror to replace their securitized subprime-mortgage packages that exploded all over us.

Wall Street wizards have been down in their corporate basements working furtively to fabricate some new, get-rich-quick financial gimmick, and — Holy Frankenstein! — they've done it.

It's a scheme based on the mundane (but huge) life insurance market. Wall Street intends to tap into the $26 trillion-worth of life insurance policies that Americans hold, using a financial mechanism called "life settlements."

Often, the ill and elderly need cash for assisted living or myriad other reasons, and a small network of insurance brokers exists to offer them a sizeable pile of money in exchange for being named the beneficiary of the policy. A broker might pay $400,000 for a million-dollar policy.

Wall Streeters intend to turn these life settlements into a big boon for investment banks and super-rich speculators. First, they will take over the broker side of the business, setting up extensive networks of heavily advertised, life-settlement agencies across the country to entice sick and old folks into settlements. You can imagine the come-ons: "Free Cash!" "Cash-in BEFORE You Die!" "You CAN Cheat Death!"

Next, Wall Street banks will "securitize" these settlements — i.e., they will package thousands of them into bonds that they'll then sell (for hefty fees) to big investors around the globe. As a result, when Uncle Bob croaks in Dubuque, some speculator in Dubai will collect Bob's life insurance payout.

Drooling bankers anticipate a $500 billion market for this hustle. Even as Washington discusses ways to regulate Wall Street's earlier frenzied securitization lunacy, the giant banks are working themselves into this next frenzy.

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