Wall Street's latest bet: how quickly will Americans die?

Simon English
15 Sep 2009

One year from the collapse of Lehman Brothers, an event that was supposedly so seismic that things would never be the same again, and what's changed on Wall Street? Almost nothing.

If you thought that New York's finance centre would be so ashamed of its failings that it would adjust itself, then you haven't got the measure of the place.Following the mortgage disaster, it is no longer so keen to bet on how fast Americans will have their homes repossessed, but it does have a new wheeze: betting on how fast they will die.

The plan is to buy life insurance policies from sick people who decide they want the cash now, either to splash on a dream holiday or to spend on a desperate search for a cure.

So a poorly 55-year-old with life insurance worth $2 million sells that policy to Wall Street for $800,000. The bankers package thousands of these deals into bonds which they sell to investors — securitisation, in bank jargon.

Derivatives that ape the bonds will also be spun off, allowing the bet to be increased without tying up too much capital — an almost-exact replica of the subprime mortgage crisis (the
subprime death scandal is but years away).

In the meantime, the investors wait for the insurance policyholders to die so they can receive the payouts (the sooner the sick check out, the higher the payment).

Defenders of these schemes (the banks aren't yet talking about these deals in public) point out that policyholders who do surrender their life insurance get a much better deal from Wall Street than they would if they just sold them back to the insurers.

But the point is, say critics, that life insurance is not meant to be a gamble — and turning these products into an investment gambit is bound to lead to trouble.

What happens when a Wall Street cartel forms to force down the price of the settlements, to fix the market? (Don't say it can't happen.) Who decides how risky the securitised life-bonds are? The same ratings agencies that got it so wrong on mortgages.

And what happens if, miracle of miracles, there are healthcare breakthroughs that mean Americans live longer than expected? Well, then the insurers and the banks go bust.

At one point this year, there seemed to be agreement that the mysterious derivatives market needed to be brought into the open and properly regulated.

There now appears to be almost zero chance of this happening; Wall Street doesn't want it and the political will to force it through against the bankers' wishes doesn't exist.

It's already clear that the main outcome of Lehman has been to consolidate power in a smaller number of players intent on carrying on precisely as before.

Figures from the Economic Policy Institute show that the four biggest US banks have about 45% of industry assets, up from 27% in 2003. So the too-big-to-fail institutions are even bigger than ever.

Wall Street likes to portray its critics as anti-capitalists, but this isn't so. Perhaps the most successful capitalist in history, Warren Buffett, has an utter disdain for the place and is known to figuratively (and actually) hold his nose while dealing with it.

His advice to the young stockbroker looking to build a niche on Wall Street was to take the high road, on the basis that he'd be unlikely to encounter much traffic.

The City of London is mostly a force for good; Wall Street is not. It is a small clique of self-serving institutions and individuals that have managed to capture far too much influence to the extent that even when they mess up as badly as they just did, a genuine overhaul of working practices seems impossible.

This time will be different, they say. Lessons have been learnt. Betting on life insurance contracts will be a success. For a few years anyway...

Rupert's boxing cleverly with London pubs that people find to their taste

“We don't do recession. It's a banned word around here.”

That refreshing approach comes from Rupert Clevely of Geronimo Inns (other pub bosses take note).

Geronimo runs 27 pubs, all within London, which are building a reputation as thoroughly decent places to get an interesting pint of beer, a proper glass of wine or classy fish and chips.

Clevely insists he isn't in the gastro-pub business, mindful that the term is a cause of abuse from those who think pubs should sell one type of bitter, smell of wet dogs and refuse entry to women.

But he's not far off and needn't feel defensive.
Reclining at The Prince Albert in Battersea, which he recently bought from Punch Taverns, Clevely is far removed from the stereotypical publican (The Pub Landlord he is not). If he does sweat, you suspect it smells of Veuve Clicquot, where he worked for 20 years.

His concept is to run London “village” pubs which appeal to locals in, among other places, Islington, Chelsea, Clapham, Wandsworth and Primrose Hill. (The Elgin at Ladbroke Grove is a Geronimo's, as is the Duchess of Kent near Highbury.)

Given its clientele, Geronimo was always likely to ride the recession better than others but Clevely deserves credit for refusing to whinge. His dismisses the complaints voiced by other publicans — that margins are so tight it's impossible to run a profitable boozer without being mean to staff and customers alike — as “nonsense”.

And there's clearly no place for that feeling common in so many pubs that being nice to regulars would be somehow un-British.

Still, pleasant as these inns are, there's something missing — the very best pubs are slightly gritty. Clevely takes the point, but says the pubs reflect who he is and thinks there's little point in pretending to be someone else.

“How can I run a gritty pub when my first name is Rupert?” he asks.

It's my lucky day! Three grand from Walsall Council

Last week, Walsall Council sent me a cheque for £3000.

I spent some time trying to justify this so I could cash it in, but no, I've never done any work for Walsall Council. I asked two cheque experts if I'd be doing anything wrong by claiming the money. They said: yes, fraud.

Is it some cunning scam whereby I end up being held to ransom by violent criminals? No, they said, it's a foul-up.

I asked Barclays if the cheque looked like one of theirs: yes, they said, we'd honour it.

Administrative errors in local government are commonplace, but this one is genuinely mystifying.
To get to the bottom of it, I left messages with Walsall seeking an explanation but, of course, they didn't bother to phone back.

Anyway, if Walsall Council owes you £3000, I've got it.