The Future of Finance?

So much for change. In the wake of the mortgage-market fiasco, in which get-rich-quick schemes alchemized in the cubicles and conference rooms of Broad Street translated into a meltdown of the international financial system, bankers have been looking for new markets to tap. But despite all talk of a new approach to the future of finance, the reality is that the most recent innovations are only geared to resurrect the same old broken system.

This past Sunday, The New York Times reported on one of the financial industry’s newest tactics—to securitize not mortgages, but bought-out life insurance policies. Wall Street firms buy policies from holders, continuing to pay monthly premiums until the original policyholder dies and the firm collects the life insurance money. The way in which these policies are bundled and sold as derivatives is suspiciously reminiscent of the way mortgage-backed securities were sold to investors. Upping the ante even more is a whole new set of ethical implications that comes with buying and selling life insurance policies on a wide market.

Wall Street argues, albeit on weak ground, that the new model does in fact learn from the lessons of the last decade. In the mortgage-backed security market, subprime loans functioned as adversely selected “lemons,” and the mortgages most likely to fail were the ones most likely to compromise the integrity of the securitized assets. In this new market of life insurance securities, it is instead the healthy insurance candidates who are the liability. This time, to offer life insurance to the physically unhealthy—in other words, the “subprime”—candidates is to actually back the interests of bankers interested in making a quick return on their investment. For banks to buy out policies from candidates near death is a sure payout. Just as loans were once urged on subprime candidates in the drive to expand the base of mortgages for securitization, nothing now stops Wall Street from engineering a way to encourage the sick and elderly to take out life insurance plans—before buying out these plans for repackaging and investment.

But more than just this economic difference, a big ethical distinction exists between tampering with the mortgage market and with the life insurance market. In an increasingly interconnected business world in which the financial industry is never more than a BlackBerry’s call away from the health insurance industry, conflicts of interest are bound to arise. As the two legislative battles of the summer—financial regulation and health-care reform—have shown, the two industries are alike in their greed, ambition, and self-interest. Collusion is in the best interest of both sides: Insurance companies are encouraged to drop health care, and policyholders know that mortality ensures an even bigger payout for Wall Street. And so who better than health insurance companies to invest in these new asset-backed securities? More than merely “killing Grandma,” now someone’s getting a fat check when she croaks.

Indeed, with mortgage securitization, at least banks intervened in the right to property by way of extending mortgage credit to those otherwise unable to own a home; however corrupt the practice was in hindsight, at least a positive externality existed. But, life insurance securitization is far worse, an encroachment on Locke’s natural rights: life and liberty. To sell a financial underwriter your life insurance policy is like circulating a trading card among investors—one that cashes in when you die. Until then, it merely functions as a liability for the underwriter and investors, equally an asset and a death wish.

More than mere financial regulation, real responsibility on the part of bankers and those on Wall Street is needed, given the absurdity of inventions flowing from these banks. Just because something can be securitized does not mean that Wall Street ought to underwrite it. Financial engineering must be constructive and bear value not just to financial firms, but also to the inherent goals of the world of finance—providing credit and financing to firms and households. The industry’s latest ideas seem more like “Modest Proposals” than serious pitches, more tongue-in-cheek ways to expose the industry’s greed than earnest ideas to provide financial services. The future will certainly be grim if, in the drive to resurrect the financial markets, reason and ethics are further abandoned along the way.

Ashin D. Shah ’12, a Crimson photographer, is an applied mathematics and economics concentrator in Pforzheimer House.