New exotic investments emerging on Wall Street

New exotic investments emerging on Wall Street
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First Published: Sun, Sep 06 2009. 09 55 PM IST
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.
The bankers plan to buy “life settlements”, life insurance policies that ill and elderly people sell for cash—$400,000 (around Rs1.95 crore) 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.
Either way, Wall Street would profit by pocketing sizeable fees for creating the bonds, reselling them and subsequently trading them. But some who have studied life settlements warn that insurers might have to raise premiums in the short term if they end up having to pay out more death claims than they had anticipated.
The idea is still in the planning stages. But already “our phones have been ringing off the hook with inquiries”, says Kathleen Tillwitz, a senior vice-president at DBRS, which gives risk ratings to investments and is reviewing nine proposals for life insurance securitizations from private investors and financial firms, including Credit Suisse Group AG.
“We’re hoping to get a herd stampeding after the first offering,” said one investment banker not authorized to speak to the media.
In the aftermath of the financial meltdown, exotic investments dreamed up by Wall Street got much of the blame. It was not just subprime mortgage securities but an array of products—credit default swaps, structured investment vehicles, collateralized debt obligations—that proved far riskier than anticipated. The debacle gave financial wizardry a bad name everywhere else, but not on Wall Street. Even as Washington debates increased financial regulation, bankers are scurrying to concoct new products.
But some are dismayed by Wall Street’s chasing profits with complicated new products.
“It’s bittersweet,” said James D. Cox, a professor of corporate and securities law at Duke University. “The sweet part is there are investors interested in exotic products created by underwriters who make large fees and rating agencies who then get paid to confer ratings. The bitter part is it’s a return to the good old days.”
©2009/The New York Times
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First Published: Sun, Sep 06 2009. 09 55 PM IST
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