The NY Times has a depressing front page article on what Wall Street is eyeing as its next big thing—bundling life insurance:
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.
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.
In spite of some criticism that premiums might need to be raised, one company that rates investment risk says, "our phones have been ringing off the hook with inquiries," and one investment banker boasts, "We’re hoping to get a herd stampeding after the first offering."
The Times goes into detail about what the plan may entail; James Cox, Duke University professor of corporate and securities law, says, "It’s bittersweet. The sweet part is there are investors interested in exotic products created by underwriters who make large fees and rating agencies who then get paid to confer ratings. The bitter part is it’s a return to the good old days." Guess this is a good time to listen to This American Life's breakdown of the subprime mess, The Giant Pool of Money (transcript PDF).
