Fresh out of credit default swaps, collateralized debt obligations and subprime mortgage bonds, Wall Street’s financial wizards have found a new way to make money. According to the New York Times, banks are planning to buy life insurance policies from elderly people who need cash, then package them into bonds that are resold to investors. The investors, in effect, buy the income stream from policies paying out when people die. Call them collateralized death obligations if you will.
Wall Street will make fat fees from packaging, selling and then trading those “bonds”. But here’s the catch: “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,” according to the New York Times. Whoa. Knowing what financial traders are prepared to do to make money – remember Enron’s energy traders shouting: “Burn, baby, burn!” as California bush fires annihilated power lines, creating shortages that sent energy prices soaring? – I’m not sure that is such a good idea. How long before some wizz hedge fund manager thinks of bumping Grandma to boost his quarterly returns?