

New Exotic Investments Emerging On Wall Street - ojbyrne
http://www.nytimes.com/2009/09/06/business/06insurance.html

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Dilpil
There 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-report...](http://www.hbs.edu/economic-
crisis/research/financial-reporting-financial-markets-and-the-subprime-
crisis.html).

~~~
joe_the_user
I 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
This is the difference between skeptical adults and students who've read Ayn
Rand and think they've figured it all out. Well done.

~~~
joe_the_user
The video really is good, one of the best elementary explanations I've seen of
the problems of CDOs.

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abalashov
_The earlier the policyholder dies, the bigger the return_

Well, now, that's a healthy, non-perverse set of incentives. :)

~~~
dejb
Not 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
Most definitely, your analysis is spot-on.

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codexon
Death bonds aren't new.

[http://www.businessweek.com/magazine/content/07_31/b4044001....](http://www.businessweek.com/magazine/content/07_31/b4044001.htm)

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njharman
I guess this means "moral hazard" can be upgraded from theory to verified to
occur in the wild.

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mixmax
At 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...

~~~
njharman
No? 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
Excellent point - I stand corrected...

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dejb
Investing 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.

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joshu
I propose we call these "ghouls"

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tybris
Aaah, so that's why we need death panels.

~~~
tybris
</joke>

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lowkey
Seriously, 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?

~~~
neilc
How would this be "one more way to steal your money"? Seems like a perfectly
legitimate investment to me.

~~~
nostrademons
It'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
_Methinks 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
What 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...

