Life (Settlements) Isn't Good for Goldman Sachs

No one ever accused Goldman Sachs of being politically correct, but the constant media barrage seems to have taken its toll. Chairman and CEO Lloyd Blankfein will take a mere $9 million bonus for 2009 ... in stock yet, and a spokesman for the investment bank announced that it will abandon one of the most controversial aspects of the insurance market, life settlements.

A simplistic description of life settlements: Wall Street bets on when you die. Brokers go out and purchase seniors' life insurance policies. Then investment banks buy and bundle them, using actuarial tables to figure out when the policyholder will expire. And finally, the buyer of these collateralized debt obligations, usually private equity and hedge funds, collects off the insurance policy when that happens.

No, it doesn't sound good, unless you're a senior who wants to unload the policy and receive money for it, in which case it makes sense. But media attention has focused on potential problems with this market, such as what if these CDO's go bad and lead to another debacle like American International Group?

Back in December, Goldman saw the handwriting on the wall and decided to wind down its Longmore Capital unit, which handled the settlements. The hugely successful Goldman spouted a variety of excuses, such as the market wasn't "big enough" for it to make money. That strikes those who know Goldman as funny, since Goldman never met a dollar it didn't like, and the current life settlement market is pegged at $7 billion. Banks such as Deutsche Bank and Credit Suisse don't seem to have this problem, and life settlement brokers, who'll meet in March, will undoubtedly find other places to sell.

The more likely rationale: Goldman doesn't want to give its detractors any more ammunition, particularly when those detractors are big life insurers with large stock and bond portfolios.

Life insurers are on the warpath against life settlements because they lose each time a senior sells their policy. Insurers have already shown their clout by taking their bond rating business away from Standard & Poor's and giving it to Pimco. And if Goldman wants to continue to play in their sandbox, it has to play nice.