Rolling the Dice Again

Guest perspective by Ralph Nader
The Wall Street gang is at it again! It’s been one year since Wall Street’s collapse and bailout took trillions from taxpayers and the sinking economy. The speculative instruments that pulled down the economy were those super-risky sub-prime mortgages, credit default swaps, collaterized debt obligations—you know—Las Vegas East, using other peoples’ savings.

As if to elaborate their gigantic con job, the investment banks, guaranteed by you the taxpayers, are now packaging life insurances policies in what sane, on the ground businesses would consider deranged exotic money plays.

Here is how the New York Times described the new securitization packages emerging from such corporate welfare goliaths as Goldman Sachs, Credit Suisse and their eager rating agency, DBRS.

“The bankers plan to buy ‘life settlements,’ life insurance policies that ill and elderly people sell for cash--…depending on the life expectancy of the insured person. Then they plan to ‘securitize’ these policies…by packaging hundred or thousands together into bonds. They will then resell these bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.

“The earlier the policy holder dies, the bigger the return—though if people live longer than expected, investors could get poor returns or even lose money.”

Continuing its lead front page story last Sunday, the Times describes Wall Street as “racing ahead for a simple reason: with $26 trillion of life insurance policies in force in the United States, the market could be huge.”

The Insurance Information Institute’s chief economist was not impressed. Speaking for the life insurance business, he said: “It’s not an investment product, [it’s] a gambling product.”

The wild and crazy derivative spree is about to inject a new and recklessly ghoulish game of chance into the financial industry. The Wall Street casino boys are already drooling over the huge fees they expect to collect. Whatever wreckage occurs down the road will soak the investors. Washington, standby for another bailout!

If this sounds alarming, consider the fact that Congress has not even reported out of any House or Senate Committee any regulatory authority for the giant derivatives businesses that places bets on bets on bets in very complex financial instruments.

Trillions of lost dollars, destabilization of the economy, depletion of pension funds and college endowments—to name some affects—and Washington is still in stasis, sitting on its cushions of corporate campaign cash and consorting with industry lobbyists who want nothing done.

Still, you the taxpayers are on the hook for another round with these corporate delinquents and gamblers!

The only difference is that this time the insurance industry seems ready to fight. It does not want to be tarred with what one executive called “the brush of subprime life insurance settlements.”

If so, my advice to insurance companies is to nip this in the bud by going to Capitol Hill. This madness will not be stopped by scattered state insurance commissioners.

With all the unmet needs for productive capital, the masters of the financial universe prefer making money from money through high velocity paper speculation, instead of financing real capital structures strengthening communities around the country.

To be sure, abstract derivatives are where the huge commissions and gigantic executive pay packages flourish. It is the arena where investment banks play blackjack. Heads they win, tails you lose.

But why do people have to pay 5,6,7 percent sales taxes in stores, but the derivative dealers on Wall Street pay no sales tax on hundreds of trillions of transactions every year? Seems like a hefty double standard, which is why Cong. Peter DeFazio (Dem. Oregon) has introduced legislation to tax such speculation. (HR 1068)

In addition, Congress needs to get going and regulate these derivatives and finally repeal Clinton-era and Bush-era laws that gave them a free ride.

Finally, there needs to be a prohibition on investments in such risky instruments by fiduciary institutions. And, standards of prudence have to be reinstated. Old time bankers and pensions managers would understand such reforms. Investor rights to sue these investment firms and rating agencies for deception and fraud are weak and require strengthening.

Someday, our society needs to decide how to increase peoples’ control over their own money and establish incentives that can attract capital flows to where they can be productive. At present, perverse incentives are reflecting sheer speculative power and are promoting grotesque uses of money.

Let these casinos and their gamblers on Wall Street do what they want with their own money, but don’t let them gamble with other peoples’ money.