Wednesday, September 9, 2009

Here's How It's Done: James D. Cox

For a while, it looked as though uncouth haters might scare the proud innovators of Wall Street away from the innovations that have made the U.S. economy the current envy of the world.

Fear not. No one will tell Wall Street that there is anything irrational in creating transferrable financial assets out of the mortality probabilities of Americans. There is, understandably, some anxiety about this. But there is a polite way to express this and an impolite way. First, the polite:

“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.”
That's how you make it into the venerable Gray Lady. Polite concern revolves around the prospect that such securities might not create gigantic, never-ending flows of cash. Other polite concerns revolve around the prospect that the root asset behind the security might be unpredictable:

In addition to fraud, there is another potential risk for investors: that some people could live far longer than expected.
And:

The challenge for Wall Street is to make securitized life insurance policies more predictable — and, ideally, safer — investments.
It's a fine line from polite to impolite, though, and while it's OK to point out the lamentable fact that people might screw up this great idea for everyone by living longer lives, it is not OK to point out that the entire scheme is a lottery of human death. I hate to even link to anyone who could be this uncouth:

But even beyond that… what the fuck??? This feels like financial innovation as practiced by Josef Mengele meets the Zucker Brothers; not just evil, but wacky evil. I don’t even want to think about what happens when Goldman Sachs suddenly has a large financial stake in the premature deaths of a bunch of old people. Where are the crazy police? Where is the crack federal crazy squad with the big butterfly net?
I've dealt with you before, Matt. Please keep your uncouth tirades to yourself.

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