After the mortgage business imploded last year, Wall Street investment banks began searching for another big idea to make money. They think they may have found one.Fair enough, right? Well, besides the fact that it could be seen as kind of predatory, those planning to do this could stand to lose if, say, people start living longer:
The bankers plan 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.
My emphasis. Think the investment banks are going to take health care reform lying down?
To test how different mixes of policies would perform, Mr. Buckler has run computer simulations to show what would happen to returns if people lived significantly longer than expected.
But even with a math whiz calculating every possibility, some risks may not be apparent until after the fact. How can a computer accurately predict what would happen if health reform passed, for example, and better care for a large number of Americans meant that people generally started living longer? Or if a magic-bullet cure for all types of cancer was developed?If the computer models were wrong, investors could lose a lot of money.
Hat tip to c1ue in this iTulip thread for the link.