Tuesday, October 13, 2009

Gaming The System

The same folks who brought you the recession and the bailouts of companies “too big to fail” are at it again. The newest brainchild of these casino-style speculators is known by various names, the most common of which is “life settlement securities”.

The very fact that “securities” is in the title is profoundly ironic.

By now, even folks who don’t follow the money-changing industry closely have come to understand that a huge part of what got us into such deep trouble was speculators who packaged mortgages into “securities” and sold them to pension funds and money-market funds that grossly underestimated the risk of these “securities”. In far too many cases, these “liars loan” mortgages were based on properties which were grossly overvalued, and obtained by borrowers who lied about their income.

Then they sold “credit default swaps” on top of the extremely risky “securities” - and it all collapsed.

Now, they’re doing essentially the same thing with life insurance policies. Right now, 27 trillion dollars worth of life insurance is in force, and that’s too big a market for the speculators to leave unsoiled. Just as they did with mortgages, speculators are buying these policies, packaging them into huge “investment packages”, and selling them to institutional investors.

And nearly none of it is regulated in any way. They just dream this stuff up and sell it.

While there are plenty of bloggers moralizing about the basic wrongness of selling and re-selling life insurance policies to make money on somebody’s death, to me it’s simply another bubble about to burst. It’s a bet on top of a gamble based on a wager. It’s another example of how naked speculation is allowed to masquerade as “investment”, with nobody looking over the money-changers shoulder.

No standards, no regulation, no accountability.

The banking, or investment, or securities, or whatever-you-want-to-call it industry felt no real consequences from the collapse of all the risky stuff they were doing. We bailed them out because they were “too big to fail”. So, nothing changed.
Look at the bonuses being handed out to the fund managers here in our own back yard at the state investment board - 1.7 million dollars worth. In the cases of a few of the top managers, their bonus payments are nearly equal to their annual salary! That’s the way that industry works. They collect those bonuses because of the way their contracts are written - even though the retirement fund has huge losses in the past couple years, and state retirees are getting smaller checks.

The entire system, from top to bottom, needs a complete overhaul and a whole lot more oversight. When pay is based on taking risks - or “generating fees”, if you’d like to put it that way - they’ll keep taking big gambles with other people’s money.

Just don’t say I didn’t warn you about “life settlement securities”.


4 comments:

  1. Tim,

    >> The banking, or investment, or securities, or whatever-you-want-to-call it industry felt no real consequences from the collapse of all the risky stuff they were doing. We bailed them out because they were “too big to fail”. So, nothing changed. <<

    I haven't found a good explanation of what would have happened if we HAD allowed these institutions to fail. The closest I've come -- which, admitedly, ain't very close -- has been to read comments that we wouldn't want the serial bank failures of the the 30s to happen all over again. Oh, my, no. But, considering that this isn't the 30's, those comments weren't very satisfying.

    How can we make any kind of decision about the financial services industry -- banks, brokers, insurance companies, financial planners, etc. -- without having a clear idea of what would happen if these outfits simply failed and were NOT picked up off the mat by the government...that is, by us?

    I would have thought that the S&L situation in the late 80s and early 90s would have taught us something. Apparently not. The pungent term, "lemon socialism", describes very well what we now have: more and more government protection of "vital" financial services.

    Of course, the financial services industry is very happy to have the government as a bedfellow, which complicates matters no end.

    But then I see stories like the one from Wednesday (http://www.thetowncrank.com/Home/tabid/153/EntryID/295/Default.aspx) and I have to wonder whether we're really up to making ANY kind of rational decision about anything.

    Steve Erbach
    Neenah, WI

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  2. nobody gives a shit

    ReplyDelete