Forum Post: Death Derivatives - Banking on Your Early Demise

JP Morgan has "more software developers than Google, and more technologists than Microsoft," says Anish Bhimani, the Chief Information Risk Officer at JPM. " . . . we get to build things at scale that have never been done before."

From Wall Street On Parade: "According to the U.S. Patent and Trademark Office, JPMorgan created the LifeMetrics Index in March 2007 as an “international index designed to benchmark and trade longevity risk.” The index was said to enable pension plans to hedge the risk of payments to retirees and incorporated “historical and current statistics on mortality rates and life expectancy, across genders, ages, and nationalities.” From 2010 through 2013, JPMorgan has received patent approval on four longevity related patents."

According to Buzzflash: "In plain language, this means that JPMorgan Chase is betting that people die sooner rather than later. That is because JPMorgan will need to pay the insurance companies if they have to payout more money than they had actuarially predicted because the people they cover are living longer. The bottom line: JP Morgan is looking to profit from early deaths. The longer the insured individuals live beyond an agreed upon average age, the more the bank must reimburse the insurance companies."

Also from WOP: "Reuters reported on August 26, 2013 that the long-term longevity bets taken on by the big banks have now started to cause pain as international capital rules known as Basel III require more capital to be set aside for longer-dated positions. The article noted that "JPMorgan likely has the biggest holdings of long-dated swaps because it is the biggest swaps trader on Wall Street, responsible for about 30 percent of the market by some measures, traders at rival firms said."

"One extremely long longevity bet taken on by JPMorgan was reported by Insurance Risk on October 1, 2008. According to the publication, JPMorgan entered into a 40-year £500 million notional longevity swap with Canada Life whereby Canada Life would make a fixed annual payment in return for a floating liability-matching payment that would increase if the annuitants lived longer than expected. JPMorgan was believed to have passed on some of the risk to hedge fund investors but retained the counter-party risk. Because many of these deals are private, the full extent of JPMorgan’s exposure in this area is not known.

"In September of last year, Risk Magazine reported that the Basel Committee on Banking Supervision, the International Organization of Securities Commissions and the International Association of Insurance Supervisors had published a report in August warning regulators that longevity swaps may expose banks to longevity tail risk – meaning, for example, that actual death rates in a given portfolio may vary dramatically from a large population index.

"One adviser is quoted as follows in the article: “You can see from the position paper that this market has a lot of characteristics that regulators don’t like in terms of banks getting involved in it. It’s based on long-dated risks, upfront payments and a serious element of hubris in assuming that the banks can model these risks better than the people who originated them. It’s potentially a market big enough to cause serious problems if it caught on and went wrong.”

Wait a minute, have JPM's tech gurus made a mistake? Have the execs lost their minds? Historically, human life expectancy has been going up, not down, right? So it seems these "LifeMetrics" indices are a guaranteed loser. It would seem so, according to a Feb 14 Bloomberg News report, which claimed AIG was "taking a $971 million impairment charge before taxes for 2013 on its holdings of life settlement contracts because people were living longer than expected."

But then, I seem to remember coming across an article somewhere last year . . . can't remember where exactly, so I Googled "life expectancy decline" and "life expectancy decreasing." A random sampling of article titles: "Life expectancy in US drops for first time since 1993 (Bloomberg)." "Life expectancy for less educated whites in US is shrinking (NY Times)." "Life expectancy declines among least educated whites (Harvard.edu)." "Falling life expectancy in the US (Forbes)." Women, it seems, have fared the worst, losing an average of five years to males three. Mother Jones has a map, and WSWS has a pretty good in-depth article.

So, just like your typical Vegas "whale," JPM's not about to let that early $971 million loss deter it from what it must consider a sure thing.

And lest you think that JPM's partners in crime aren't capitalizing on the human condition, fear not. The Vampire Squid rolled out its first "social impact bond" in May 2012, investing about $10 million in a NYC program aimed at reducing juvenile repeat offenders. According to the source, "Goldman achieves a return if there is at least a 10 percent decrease in the number of young people who return to jail." Considering Goldman's track record, plus the fact that any source I checked suggests the rate of recidivism for New York juvenile offenders is high, I'm just trying to figure out Goldman's angle.

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And that's where my draft ended when I typed it a few weeks ago, so thanks to JGriff, and credit to Truthout for posting this article which clearly explains their "angle:"

http://truth-out.org/news/item/22730-goldman-sachs-outrageous-scheme-to-profit-off-jailed-young-offenders

Personally, I wondered whether it was possible to "short" bonds, but apparently the scheme is more clever. If the program is a success, the bank makes a profit (at taxpayer expense). If it's a failure, it's considered a "charitable contribution," a tax write-off.

They have this shit down to a science, don't they? "Heads I win, tails you lose."