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New Exotic Investments Emerging On Wall Street
- deleted 17y ago[deleted]
- mixmax 17y agoAt least this scheme isn't as susceptible to systemic risk as the mortgage one that caused the recent crash. Unless a lot of people unexpectedly die of Swine flu, volcanoes or earthquakes of course...
- jonknee 17y agoThose would actually be profitable events as these instruments pay more the sooner someone dies. A cure for cancer or similar medical breakthrough would be really bad news. > "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."
- fnid 17y agoI thought the same thing when I first read the comment, but I believe the commenter meant if too many people die, then the insurance companies won't be able to pay out the life insurance policies and thus the investors will lose money.
- njharman 17y agoNo? Because insurance companies are too big to fail? And insurance companies never invest in other insurance companies, or funds, or in securitized life insurance? If insurance company fails these payments will not occur and the securities will become valueless. If these get nearly as pervasive and out of control as mortgage securities did then a big enough failure will cause they same sort of systemic meltdown.
- mixmax 17y agoExcellent point - I stand corrected...
- Dilpil 17y agoThere is nothing wrong with a hedge fund buying these things speculatively and allowing for a more fluid transfer of risk. Hedge funds exist to make a market for these kind of exotic securities, greasing the wheels of the risk markets. Buying a securitized version of these is very foolish for the pension funds. Securitization does not remove risks, it simply hides them in ways that pension fund managers are ill equipped to understand. Furthermore, these assets are potentially highly correlated- the article gives the invention of new AIDS treatments as one example. An in depth lecture on the math behind securitization (of subprime loans, but it applies to this as well) can be found at http://www.hbs.edu/economic-crisis/research/financial-reporting-financial-markets-and-the-subprime-crisis.html http://www.hbs.edu/economic-crisis/research/financial-report....
- joe_the_user 17y agoI would suggest you take a second look at the fine video you link to. I watched it to the end. Notice that at the start of the video, it's mentioned how the entire CDO system exists to generate nominally AAA rated bonds which institutional investors like pension fund have an incentive to buy in order to "demonstrate" (well, actually fake) risk aversion. The video does a good, detailed dissection of the CDO generation process using math most people can understand but it's important to shorten it an executive summary: Wall Street sold a shell-game to institutional investors who were happy not to look closely at the supposed risk-free yields. The video gives an excellent demonstration also why there is no reason for a risk-taking Hedge fund to buy a synthetic bond. This is because synthetics only exist to give the illusion of magically lowered risk (equivalently "yield out of thin air"). A risk-taking investor should be financing start-ups or businesses in trouble and a risk-averse investor should be diversified between holding the bonds of large corporations and holding cash. No one should be buying the fiction that combining risky assets creates risk-less assets.
- sachinag 17y agoThis is the difference between skeptical adults and students who've read Ayn Rand and think they've figured it all out. Well done.
- lowkey 17y agoSeriously, I read this article and I wanted to puke. Why isn't the NY Times writing articles asking, "Why aren't more Investment Banksters in jail?" instead of promoting the fact that "The Banksters have found one more way to steal your money, New life insurance backed securities!" How is this hacker news?
- byrneseyeview 17y agoIf you know they're a good deal, why don't you use your superior investment knowledge to make money. Then you can buy a newspaper and have it say whatever you want!
- neilc 17y agoHow would this be "one more way to steal your money"? Seems like a perfectly legitimate investment to me.
- nostrademons 17y agoIt's not the "steal your money" part that worries me, it's the perverse incentives that result in bigger financial payouts the more that people die. Methinks that if this becomes reality, we'll see many more seniors die of mysterious causes... On the plus side, this could solve both the population and social security problems! :-/
- neilc 17y agoMethinks that if this becomes reality, we'll see many more seniors die of mysterious causes... That seems a bit paranoid to me: what is being securitized are bundles of lots and lots of policies, so investors aren't speculating about whether a single person lives or dies. If you've purchased a package of 1000 policies, it seems pretty irrational to commit a felony just to do away with 1 of those policy holders...
- mhb 17y agoWhat if you're a hedge fund that owns these and is also deciding whether to invest in a company that has a promising cancer cure? Maybe you are willing to pay somewhat less for the company...
- codexon 17y agoDeath bonds aren't new. http://www.businessweek.com/magazine/content/07_31/b4044001.htm http://www.businessweek.com/magazine/content/07_31/b4044001....
- abalashov 17y agoThe earlier the policyholder dies, the bigger the return Well, now, that's a healthy, non-perverse set of incentives. :)
- deleted 17y ago[deleted]
- dejb 17y agoNot only in the individual case but also collectively. The holders of these bonds would stand to lose a lot of money if technological breakthroughs increased the longevity of the insured people. This would give them the incentive to stall or block these developments. Furthermore those with ability to stall these developments may be attracted towards buying these securities for this very reason. The scenarios of unlimited longevity painted by some life extensionists would be their worst nightmare. Given that the prevention death from 'old age' is not currently considered a valid medical goal it would be fairly easy for them stall development in these areas.
- abalashov 17y agoMost definitely, your analysis is spot-on.
- njharman 17y agoI guess this means "moral hazard" can be upgraded from theory to verified to occur in the wild.
- tybris 17y agoAaah, so that's why we need death panels.
- tybris 17y ago</joke>
- dejb 17y agoInvesting in these bonds would represent a huge bet against medical breakthroughs. The worst case would be if people like Ray Kurzweil were right in saying that continuing breakthroughs could keep people indefinitely.
- joshu 17y agoI propose we call these "ghouls"