stop me before i securitize again

News from the New York Times to warm the cockles of a quant's heart - and send shivers down the spine of the rest of us who don't make a living selling financial products to suckers I mean investors. The geniuses on Wall Street want 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.

Sound familiar? It's like what they did with mortgages and car loans and student loans - buy a bunch without regard for whether they were risky or solid bets, cut them into little itty bitty pieces, convince us (with the help of their lap-dog credit rating agencies, who would rate a CEO's loose bowel movement AA) that it was a good deal, and this distribute risk widely. Of course, it was predicated on people not going into default on mortgages above a certain rate. And THAT was predicated on the real estate market rising continually. Which was a false hope.

So what's wrong with this insurance thing? Already even without securitization investors are taking advantage of the sick and elderly on life settlements. Note that I don't oppose them - but they should be regulated because betting that somebody will die creates some perverse incentives.

And these insurance securities would be based on the idea that people will die on schedule. In other words, if there were a medical breakthrough and life expectancy for these policy holders increased 10%, they could become a losing proposition. So you'd create an incentive on Wall Street that would not favor medical research? Good idea.

Some Wall Street banks are also doing something called "re-remics" - resecuritization of real estate mortgage investment conduits. In other words, repackagins MONEY-LOSING investments into higher-rated ones. How does THAT work?

This all just reinforces the lesson some of us have learned over the past 18 months or so that better financial regulation is critical to the REAL economy, not just to protect the investor class.

shut it DOWN

Bank of America needs a mere $33.9 billion cushion to withstand a bad economy.

Why put taxpayer money into this just to be a shareholder?

Do like the FDIC routinely does to banks that have failed. Shut them down. Shareholders and executives lose some $$$. Shame. Clean them up. Find a buyer, and get it going again.

No trying to carry it along like a financial zombie, neither dead or alive. Put a stake thru its heart (sorry I'm mixing my monster metaphors) clean and quick.

financial regulation might be a good idea

I look forward to seeing what is in the Geithner's proposed ideas for regulating financial firms. From the Post, we see that it would "define which financial firms are sufficiently large and important to be subjected to this increased regulation. Those firms would be required to hold relatively more capital in their reserves against losses than smaller firms, to demonstrate that they have access to adequate funding to support their operations, and to maintain constantly updated assessments of their exposure to financial risk."

Gosh, doesn't that seem like the kind of thing a responsible firm would do ANYWAY? The fact that somebody has to regulate simple prudence is an argument in favor of regulation.

As for regulating derivatives and being given the power to shut down non-bank financial firms, well I think the fine example of AIG, the bail-out that keeps on bailing, is probably a good indicator of why such abilities are probably a Good Idea.

risk and aig

Today the Washington Post ran part one of a three-parter on "The Crash: What Went Wrong." Today's installment was an interesting bit on the founding and early operations of the Financial Products people and their "beautiful machine" at insurance giant AIG - AIG of $150 billion bailout fame.

One passage in particular caught my eye:

One detail in particular nagged at (AIG CEO Hank) Greenberg. Under the joint-venture agreement, Financial Products received its profits upfront, even if the transactions took 30 years to play out. AIG would be on the hook if something went wrong down the road, not Sosin and his team, who took their pay immediately.

Later on, Greenberg changed that to defer some of their pay, based on the length of the transaction. He recognized the risk of encouraging short-term action - after all, who will still be there at the end of a 30-year transaction?