Having concocted subprime mortgage investments that nearly crippled the global economy, Wall Street is ready to pursue another exotic but potentially risky scheme.





Trying to cash in on life insurance policies could lead to trouble.

By JENNY ANDERSON

IN THE AFTERMATH of the financial meltdown, exotic investments dreamed up by Wall Street got much of the blame. It was not just subprime mortgage securities but an array of products - credit-default swaps, structured investment vehicles, collateralized debt obligations - that proved far riskier than anticipated.

The debacle gave financial wizardry a bad name, but not on Wall Street. Even as Washington debates financial regulation, bankers are concocting new products. In addition to securitizing “life settlements - the packaging of life insurance settlements into investment bonds - some banks are repackaging their money-losing securities into higher-rated ones, called re-remics (re-securitization of real estate mortgage investment conduits). Morgan Stanley says at least $30 billion in residential re-remics have been done this year.

Already “our phones have been ringing off the hook with inquiries, says Kathleen Tillwitz, a senior vice president at DBRS, which gives risk ratings to investments and is reviewing nine proposals for life-insurance securitizations from Credit Suisse and others.

“We’re hoping to get a herd stampeding after the first offering, an investment banker said. But some are dismayed by Wall Street’s quick return to its old ways, chasing profits with complicated new products.

“It’s bittersweet, said James D.Cox, a professor of corporate and securities law at Duke University in North Carolina. “The sweet part is there are investors interested in exotic pro ducts 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.

The bankers plan to buy the life settlements for cash - $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person, who is often elderly or ill. 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.

Either way, Wall Street would profit by pocketing sizable fees for creating the bonds, reselling them and subsequently trading them.

But what is good for Wall Street could be bad for the insurance industry, and perhaps for customers, too. In the case of the life settlements that is because policyholders often let their life insurance lapse before they die, for a variety of reasons - their children grow up and no longer need the financial protection, or the premiums become too expensive. When that happens, the insurer does not have to make a payout.

But if a policy is purchased and packaged into a security, investors will keep paying the premiums that might have been abandoned; as a result, more policies will stay in force, ensuring more payouts over time and less money for the insurance companies.

“When they set their premiums they were basing them on assumptions that were wrong, said Neil A.Doherty, a professor at Wharton who has studied life settlements.

Indeed, Mr. Doherty says that in reaction to widespread securitization, insurers most likely would have to raise the premiums on new life policies.

Critics of life settlements believe “this defeats the idea of what life insurance is supposed to be, said Steven Weisbart, senior vice president and chief economist for the Insurance Information Institute, a trade group. “It’s not an investment product, a gambling product.

Undeterred, Wall Street is racing ahead for a simple reason: With $26 trillion of life insurance policies in force in the United States, the market could be huge.

Not all policyholders would be interested in selling, of course. And investors are not interested in healthy people’s policies because they would have to pay those premiums for too long, reducing profits on the investment. But even if a small fraction of policy holders do sell them, some in the industry predict the market could reach $500 billion.

Credit Suisse is in effect building a financial assembly line to buy large numbers of life insurance policies, package and resell them - just as Wall Street firms did with subprime securities.

Goldman Sachs has developed a tradable index of life settlements, enabling investors to bet on whether people will live longer than expected or die sooner than planned.

Spokesmen for Credit Suisse and Goldman Sachs declined to comment.

If Wall Street succeeds in securitizing life insurance policies, it would take a controversial business - the buying and selling of policies - that has been around on a smaller scale for a couple of decades and potentially increase it drastically. And the industry has been plagued by fraud complaints.

Stephan Leimberg, co-author of a book on life settlements, testified at a Senate Special Committee on Aging last April: “Predators in the life settlement market have the motive, means and, if left unchecked by legislators and regulators and by their own community, the opportunity to take advantage of seniors.