Profiting From Mortality -- Death Bonds

Business Week COVER STORY
By Matthew Goldstein

Death bonds may be the most macabre investment scheme ever devised by Wall Street

In May, as the subprime mortgage market was cracking, many of the biggest players in finance gathered at a conference in New York to talk about the next exotic investment coming down the pike: death bonds. When the event was held two years ago, just 250 people showed up. This time, nearly 600 descended on the Sheraton Hotel & Towers for the three-day confab, including delegations from Bear Stearns (BSC ), Deutsche Bank (DB ), Lehman Brothers (LEH ), Merrill Lynch (MER ), UBS (UBS ), Wachovia (WB ), Wells Fargo (WFC ), and other big firms. They flocked to seminars with titles such as "Legislative Review," milled about the exhibition hall picking up the usual conference swag, and buzzed at luncheons and a Carnegie Hall gala about the big push into the market being made by Cantor Fitzgerald, a major bond-trading shop. With all the happy banter, you wouldn't have known they were there to learn about new and imaginative ways to profit from people dying.

Death bond is shorthand for a gentler term the industry prefers: life settlement-backed security. Whatever the name, it's as macabre an investing concept as Wall Street has ever cooked up. Some 90 million Americans own life insurance, but many of them find the premiums too expensive; others would simply prefer to cash in early. "Life settlements" are arrangements that offer people the chance to sell their policies to investors, who keep paying the premiums until the sellers die and then collect the payout. For the investors it's a ghoulish actuarial gamble: The quicker the death, the more profit is reaped. Most of the transactions are done by small local firms called life settlement providers, which in the past have typically sold the policies to hedge funds. Now, Wall Street sees huge profits in buying policies, throwing them into a pool, dividing the pool into bonds, and selling the bonds to pension funds, college endowments, and other professional investors. If the market develops as Wall Street expects, ordinary mutual funds will soon be able to get in on the action, too.

BUT THE INVESTMENT BANKS are wading into murky waters. The life settlements industry increasingly finds itself in the grip of dubious characters devising audacious and in some cases illegal schemes to make money. Many are targeting elderly people with deceptive sales pitches—so many that the National Association of Securities Dealers has issued a warning about abusive practices. Others are promising investors unrealistic returns or misleading them about the risks. Some are doing both.

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http://www.businessweek.com/magazine/content/07_31/b4044001.htm?chan=search

and grab their life insurance, sell them reverse mortgages, and provide them with overpriced health insurance. That's the ticket! Now I have to buy one of those $1.5 million Volkswagen Veyrons to park in my 39 bay garage in the Hamptons.