(continued from above)



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 counterparty risk. Because many of these deals are private, the full extent of JPMorgan’s exposure in this area is not known.

Wall Street veterans have also commented on the fact that JPMorgan may actually stand to profit from the early deaths of the two young men in their 30s. As we reported in March of last year, when the U.S. Senate’s Permanent Subcommittee on Investigations released its report on JPMorgan’s high risk bets known as the London Whale debacle, its Exhibit 81 showed that JPMorgan’s Chief Investment Office was also overseeing Bank Owned Life Insurance (BOLI) and Corporate Owned Life Insurance (COLI) plans which allow the corporation to reap huge tax benefits by taking out life insurance policies on workers – even low wage workers – and naming the corporation the beneficiary of the death benefit. Both the buildup in the policy and the benefit at death are received tax free to the corporation.

According to the exhibit, the Chief Investment Office was tasked with “Maximization of tax-advantaged investments of life insurance premiums” for the BOLI/COLI plans. According to a report in the Wall Street Journal in 2009, JPMorgan had $12 billion in BOLI, noting that a JPMorgan spokesperson had confirmed the figure. Other insurance industry experts put the total for both BOLI and COLI at JPMorgan significantly higher.

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 advisor 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.”

That things are starting to go seriously wrong was evident in a Bloomberg News report that emerged last Friday. AIG reported that it 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. AIG is the company that was bailed out by the U.S. taxpayer to the tune of $182 billion during the financial crisis because of bets gone wrong.

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