Thank you for your response. I will read your take on the industry and its’ products via the link you provided. I agree that permanent life has its place in certain circumstances, but like interest-only or neg-am mortgages, the products were eventually pushed on the public as a whole by an industry that could not look beyond the next quarter and their representatives that could not look beyond the commission.

I think it is important to make the distinction, which you did, between term and permanent. And it is equally important to note that investors are only interested in policies of the permanent variety.

You are correct that this is not a zero sum game – insurers will see fewer policies redeemed than expected should the settlement industry expand with or without the assistance of securitization. So they will be the losers, but protected by the Too Big to Fail mandate. America’s seniors, on the other hand, have no such protection and any attempt to “protect” them from Wall Street will have the predictable opposite than intended effect.

I derive no income from life insurance or annuity sales, and have not for the past 11 years. Annuities? I have been a critic there as well, but have derived income from the area, though I have never received a sales-based payment.

For some of my criticisms please consult the insurance articles listed on this page:

http://alephblog.com/major-article-list/

To answer another question, on how this hurts the insurance company: most pricing actuaries price in a certain amount of baseline surrender activity when it is not in the interest of the insured to do so. When surrenders drop in later years, the present value of total claims rises more than any incremental increase in investment income.

As for bailing out the muni market– there was no legal basis for bailing out AIG (which was really a GS bailout in drag). That was Henry Paulson looking after his cronies.

Bernanke is right that there are legal problems in bailing out muni bonds — but in the end it all comes back to asking how an insolvent Federal Government can realistically bail out any more entities of any kind.

Inflation / USD depreciation is the obvious political answer — but even super model Gisele noted that currency devaluing didn’t really help the banana republics of the past

I worry that GNMA is too big to save — much like Citi, BofA, etc. So the powers that be will have to torture the accounting code even more.

And I don’t know any good way to model / think about how that might unfold…

David?

Part of that bargain is the dealers must buy lots of Treasury bonds using the Fed Funds they get at 0%. Foreign CBs seem to be buying *less* (not zero, and they aren’t selling). Joe Q America can’t pay his mortgage and his 401K has been trashed — so a sudden surge of Treasury buying with money he doesn’t have seems unlikely. Its Ben Bernanke buying Treasuries — albeit using banks and primary dealers as front men

Defaulting (broadly defined) on GNMA bonds carries a lot less headline / political risk for the Treasury than defaulting on Treasury bonds. The liabilities could be “restructured” with longer maturities and/or lower coupons — which is still a default but something the news weenies could spin other ways.

The reason I am asking all this about GNMA is that Congress seems to be pushing lower and lower quality lending onto GNMA’s books — very similar to what they did to FNMA and FHLMC.

The Treasury can’t “bail out” GNMA, since they are two parts of the same whole (Uncle Sam) — but any failure would be even more spending of money the government doesn’t have.

And since David seems to be able to articulate things in common sense terms, my big question that started all this:

how does he model political / sovereign risk?

While I appreciate your thoughts on the subject, I would have hoped you would provide a little in the way of full disclosure. If life insurance is something that should be sold, do you sell these products?

Do you provide transparency to your clients with regard to commissions, fees and expenses, not by a 700-page prospectus but verbally? Do you demonstrate the option of term life with the substantial difference in premium invested in a no-load government bond fund or ETF?

Despite the risk undertaken by the life insurers, the permanent life products they sell are designed to fail the policyholder. After retirement, the need to protect income disappears, but the premiums remain. For most, negative cash flow investments and retirees go together like peanut butter and mayonnaise. By any estimate, north of 80% of these products will never pay a death benefit, cashed in for a return that would rival that of a simple savings account.

Wall Street is not creating demand where it does not exist. It’s there and it’s real. And as long as the Fed keeps fixed income returns to the bare minimum, Wall Street’s clients, many of which will be life insurers themselves, will see life settlements as a important vehicle to help meet their future obligations, to say nothing of helping what could be millions of seniors repair their impaired balance sheets.

Its amazing how many Wall Street folks trade GSE bonds and don’t bother to read up on them. FNMA and FHLMC were never explicitly backed, no matter how many “analysts” said otherwise. FNMA and FHLMC were investor owned, and legally only had the right to borrow $3 billion apiece from the US treasury.

GNMA bonds were and are explicitly backed. GNMA is 100% owned by the US government. GNMA backs bonds – it is (or was) an insurer like AIG. But the government backs GNMA, explicitly and without any statutory limits. Go look at the website if you aren’t sure.

As for the flight to Treasuries, I agree — but therein lies the problem. GNMA’s are Treasuries (at least from a credit risk prospective) with prepay risk.

Some of the liquidity risk of GNMA’s no doubt stems from Wall Street’s ignorance of what does and does not have full government backing