CRANKY GENIUS

The 1987 Stock Bubble. The 2000 Tech Bubble. The 2006 Mortgage Bubble. Each of these bubbles drove the economy through a manic cycle of growth to a point of irrational exuberance (quoting Alan Greenspan) only to suffer a bi-polar swing of stock market crash, job losses, and industry devaluation, along with shattered consumer confidence. The Stimulus Bubble, as some are calling it, may produce similar results.

But there is one bubble no one is paying attention to – no one except for Jenny Anderson of the New York Times. If we are to extrapolate from Ms. Anderson’s recent report, the next economic bubble is… Life Insurance!

Wall Street bankers are scrambling to create a new financial product, something they can securitize, something they can turn in to bonds, something that provides a steady source of cash flow with predictable payouts and low risk. Life insurance fits this profile to a tee.

Here is what’s going on.

Wall Street bankers buy the life insurance policies of the elderly and ill for cash at a percentage of the face value that is determined by the life expectancy of the policy holder. The policy holder gets the cash, the banker gets a fat commission, and the bond holder gets a nice secure investment based on the promise of a future payout that has the potential to more than double the investment.

However, the devil is in the details. The banker bundles all the policies together into a bond fund (something called “securitizing”), slices them up into AAA, AA (ad nauseam) rated bonds, and then sells these bonds to big investors like state and union pension managers. (Sound familiar?) The rating would be based in part on the life expectancy of the original policy holder. A terminally ill former policy holder warrants a AAA rating. The policy from a health-conscious person, someone who has taken steps to ensure a long healthy life, goes into the BB bond fund.

Welcome to the institutionalized Dead Pool! Where is Sarah Palin when we need her?

On the surface it seems like a win-win scenario. Everyone wins except the life insurance companies, and who cares about them?

You should and here is why.

In the real world, at some point, many life insurance policy holders stop paying their premiums – be it unemployment, too sick to work, or deciding it is  just not worth it. Like it or not, this customer fall-off windfall is built into the business models for many insurance companies; this allows them to pass the savings along to you and remain competitive and profitable. The price of life insurance premiums is the only way life insurance companies can compete because the end product is all the same – cash upon death of the insured.

The new scheme being hatched by Wall Street bankers eliminates the customer fall-off windfall because, as part of the agreement to purchase the life insurance policy, the banker continues to pay the life insurance premium irrespective of the health or circumstances of the insured.

If the insurance company cannot rely on customer fall-off windfall to keep premiums low, the traditional business model is shot and cost of insuring the lives of policy holders goes up. The cost is not just passed along to you, it also compels the insurer to make much higher payouts than before. Eventually as the population ages, bankers pay even higher premiums for the next generation of policy holders whose insurance policies they purchase.

In this scenario, the cost of life insurance policies continually spirals higher and higher, unsustainably. Ultimately it collapses just like the other bubbles bringing down the economy with it.

And what, pray tell, happens to this investment scheme in the event of a life extending wonder drug, or even *gasp* a cure for cancer??!

Wall Street bankers and their exotic financial products must be stopped before they ravage yet another industry with their snake oil concoctions. And you should all breath a collective and loud sigh of relief that former President Bush failed to privatize Social Security.

An economy based on a dead pool…?

I don’t think so.