Deadly Derivatives!

And after writing the question on Ethics & Financial Crisis you thought what about the next batches of GBS MBA what will they have to write about there cant be anything bigger and unethical than the Sub Prime Crisis! BITE YOUR TONNGUE~
Ladies&Gentleman welcome to "Death Derivatives"

After the Sub prime explosion Wall Street investment ia back with another idea to make money and that makes the Sub Prime Crisis looks like sissy!(Wharton has a nice article on this @2002!!)
A life settlement generally refers to the sale of a life insurance policy by a policyowner for less than the face value but more than cash-surrender value of the policy to third party investors.

The I bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash say a 50%-70% discount depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, 'street speak'- by packaging hundreds or thousands together into bonds. They then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.

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.

Either way it is A WIN WIN for the I bankers - They would profit by pocketing sizable fees for creating the bonds, reselling them and subsequently trading them. But actuarial experts warn that insurers might have to raise premiums in the short term if they end up having to pay out more death claims than they had anticipated.

Wall Street-Insurer Zero Sum Game?
Indeed, what is good for Wall Street could be bad for the insurance industry, and perhaps for customers, too. That is because policyholders often let their life insurance lapse before they die, for a variety of reasons — their children grow up and no longer need the financial protection, or the premiums become too expensive. When that happens, the insurer does not have to make a payout.

But if a policy is purchased and packaged into a security, investors will keep paying the premiums that might have been abandoned; as a result, more policies will stay in force, ensuring more payouts over time and less money for the insurance companies.

Wall Street is obviously ecstatic for a simple reason: With $26 trillion of life insurance policies in force in the United States, the market is HUGE.

Not all policyholders would be interested in selling their policies, of course. And investors are not interested in healthy people’s policies because they would have to pay those premiums for too long, reducing profits on the investment.

But even if a small fraction of policy holders do sell them, some in the industry predict the market could reach $500 billion.

Goldman Sachs apparently wants nothing to do with this and have called themselves out of this business early(tradable index of life settlements) ? are we in for a another round of CDO' ?

Sell everything.

Looking at bond markets really makes me sad. Nobody learned anything from the financial crises. If I see that Brazilian EUR-denominated govies with a fantastic BBB- rating yield between 0.86% (maturity in Feb 10) and 4.48% (maturity Feb 15) I don't even need to look at other EM bonds to know its time to sell. Everything.

Tom.

Britain to impose one-off tax on bankers' bonuses

Having worked in the investment banking industry before this wonderful MBA program, I would like to share my views on this issue with you.

The reasoning behind the idea makes some sense: Investment banks would have all gone bust without the help of governments. This is true even for houses like Deutsche Bank that didn't get money directly - had the US not bailed out AIG, Deutsche Bank would have lost billions. And, being a taxpayer, I don't like the idea that banks just take my money and pass it on to some Aston Martin drivers.

On the other hand: The British government actually owns large parts of the financial industry. If they are concerned about the capital of their banks, why don't they just keep RBS and Lloyds from paying bonuses? If they are concerned about the capital of the whole industry, why don't they increase capital requirements? If they want high-income people to share the burden, why don't they just increase the income tax?

And how long will it take banks to find ways to get around this tax, anyway?

Here's my interpretation: "We don't want to pay bonuses at our banks, but we don't want our best people to leave. And we want to demonstrate that we hate these City guys just as much as everybody else does. And if the tories don't like our one-off tax, we can really push them into the "only for the rich" corner. If they support it, they'll lose voters to the liberal party. Looks like we can only win! Let's do it! Yeah!"

Tom.

Prof Haliassos on the 'Greek Tragedy'

Time Magazine has stuck its neck out just published its obituary on the Fitch downgrade the Greek Economy,calling it the Next Dubai.Needless to ask I did go and ask our Macro Prof on his views on this,His answer was straight to the Point, 'We see that whenever something like this happens the EU has to 'talk it up' since it has greater consequence to the whole concept of an Integrated Monetary Union'.
He went on to express his confidence with the Present Finance minister Giorgos Papakonstantinou who happens to be his good friend and Junior at School,"He has to bring down the deficit",Prof added.

My doubts based on my current half baked knowledge of Economics & Google Search! is
1) A 3% decrease in Fiscal Deficit under the current environment is the ambitious task for the Greek Finance minister is it Feasible ?
2) The problem is going to be tough not now ,but next year when the current government debt comes for 'roll over',obviously due to the downgrades of the Credit Rating Agencies the cost is going to baloon!




Venkat


PS : Here is a question for the readers of this post how would AS AD look ? the one who posts the correct curve shift on this(will verify with experts!) will get a Gluh Wein!
PPS: My current ambition at the MBA is to complete atleast one paper completely on time! I just hope that this AS AD question turns up in the Exam!

A Fable for Growthmen

If you think the Blanchard chapter on growth is a little bit dry, have a look at this one here:

Once upon a time the Kingdom of Solovia was gripped by a great debate. "This is a growing economy but it can grow faster," many argued. "Sustainable growth is best," came the reply, "and that can come only from natural forces."
A few called the debate growthmanship. But most thought it would be healthy if it led to a better understanding of Solovian growth. So the King appointed a task force to learn the facts of Solovian economic life. ...

Much more fun to read - google "The Golden Rule of Accumulation: A Fable for Growthmen" and you'll find it.

Tom.