[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
RECENT INNOVATIONS IN SECURITIZATION
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON CAPITAL MARKETS,
INSURANCE, AND GOVERNMENT
SPONSORED ENTERPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 24, 2009
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-79
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54-870 WASHINGTON : 2009
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota KENNY MARCHANT, Texas
RON KLEIN, Florida THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio KEVIN McCARTHY, California
ED PERLMUTTER, Colorado BILL POSEY, Florida
JOE DONNELLY, Indiana LYNN JENKINS, Kansas
BILL FOSTER, Illinois CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana ERIK PAULSEN, Minnesota
JACKIE SPEIER, California LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Capital Markets, Insurance, and Government Sponsored
Enterprises
PAUL E. KANJORSKI, Pennsylvania, Chairman
GARY L. ACKERMAN, New York SCOTT GARRETT, New Jersey
BRAD SHERMAN, California TOM PRICE, Georgia
MICHAEL E. CAPUANO, Massachusetts MICHAEL N. CASTLE, Delaware
RUBEN HINOJOSA, Texas PETER T. KING, New York
CAROLYN McCARTHY, New York FRANK D. LUCAS, Oklahoma
JOE BACA, California DONALD A. MANZULLO, Illinois
STEPHEN F. LYNCH, Massachusetts EDWARD R. ROYCE, California
BRAD MILLER, North Carolina JUDY BIGGERT, Illinois
DAVID SCOTT, Georgia SHELLEY MOORE CAPITO, West
NYDIA M. VELAZQUEZ, New York Virginia
CAROLYN B. MALONEY, New York JEB HENSARLING, Texas
MELISSA L. BEAN, Illinois ADAM PUTNAM, Florida
GWEN MOORE, Wisconsin J. GRESHAM BARRETT, South Carolina
PAUL W. HODES, New Hampshire JIM GERLACH, Pennsylvania
RON KLEIN, Florida JOHN CAMPBELL, California
ED PERLMUTTER, Colorado MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana THADDEUS G. McCOTTER, Michigan
ANDRE CARSON, Indiana RANDY NEUGEBAUER, Texas
JACKIE SPEIER, California KEVIN McCARTHY, California
TRAVIS CHILDERS, Mississippi BILL POSEY, Florida
CHARLES A. WILSON, Ohio LYNN JENKINS, Kansas
BILL FOSTER, Illinois
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
C O N T E N T S
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Page
Hearing held on:
September 24, 2009........................................... 1
Appendix:
September 24, 2009........................................... 33
WITNESSES
Thursday, September 24, 2009
Curry, Daniel, President, DBRS, Inc.............................. 19
Dorsett, J. Russel, Co-Managing Director of Veris Settlement
Partners, on behalf of The Life Insurance Settlement
Association.................................................... 12
Dubberly, Paula, Associate Director, Division of Corporation
Finance, U.S. Securities and Exchange Commission............... 7
Gearhart, Kurt, Global Head of Regulatory and Execution Risk,
Life Finance Group, Credit Suisse.............................. 15
Kelly, Jack, Director of Government Affairs, The Institutional
Life Markets Association....................................... 14
Pardo, Brian D., Chairman and Chief Executive Officer, Life
Partners Holdings, Inc......................................... 10
Strongin, Steven H., Managing Director and Head of Global
Investment Research, Goldman, Sachs & Co....................... 18
Voss, Hon. Susan E., Commissioner, Iowa Insurance Commission, on
behalf of The National Association of Insurance Commissioners.. 8
APPENDIX
Prepared statements:
Kanjorski, Hon. Paul E....................................... 34
Curry, Daniel................................................ 36
Dorsett, J. Russel........................................... 43
Dubberly, Paula.............................................. 51
Gearhart, Kurt............................................... 63
Kelly, Jack.................................................. 73
Pardo, Brian................................................. 85
Strongin, Steven H........................................... 92
Voss, Hon. Susan E........................................... 97
Additional Material Submitted for the Record
Written statement of Joseph M. Belth......................... 103
RECENT INNOVATIONS IN SECURITIZATION
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Thursday, September 24, 2009
U.S. House of Representatives,
Subcommittee on Capital Markets,
Insurance, and Government
Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:35 p.m., in
room 2128, Rayburn House Office Building, Hon. Paul E.
Kanjorski [chairman of the subcommittee] presiding.
Members present: Representatives Kanjorski, Sherman, Scott,
Maloney, Minnick, Kosmas, Grayson, Himes; Garrett, Manzullo,
Capito, and Jenkins.
Also present: Representatives Watt, Green, and Hirono.
Chairman Kanjorski. This hearing of the Subcommittee on
Capital Markets, Insurance, and Government Sponsored
Enterprises will come to order.
I ask unanimous consent that Ms. Hirono of Hawaii have
permission to participate in today's hearing. Pursuant to
committee rules, each side will have up to 15 minutes for
opening statements. Without objection, all members' opening
statements will be made a part of the record.
We meet this afternoon to examine recent innovations in our
securities markets, especially those related to life insurance
settlements. While the life settlement industry is now well
established and quickly growing, the securitization of life
settlements remains in its infancy. Investors, however, have
already gained access to securities products like life
settlement funds, mortality indexes, and derivatives linked to
life settlements.
Today's hearing offers us an incredible opportunity to
employ the lessons that I hope we all learned, even though we
paid too dear a price to learn them, about issuing toxic
securities. By asking some fundamental questions about this
industry, we can prevent trouble using foresight rather than
later undergoing disaster in hindsight.
Specifically, we should ask how one would securitize life
settlements, what is needed to properly securitize these
products, and whether or not we should securitize them. We
should also explore how we can protect those who invest in
these products and better safeguard those who sell their life
insurance policies.
Perhaps most importantly, we must examine whether or not
securities products based on life settlements actually
contribute to economic growth or merely prolong the casino
culture on Wall Street that got us into our current economic
mess.
Generally, I see enormous value in securitization. Pooling
assets together to create new products can effectively allocate
limited economic resources. Securitization has mobilized
trillions of dollars of capital from around the world to enable
Americans to purchase cars and homes, obtain a college
education, and start new businesses. Through securitization, we
have also created new sources of liquidity and helped investors
to diversify their portfolios. In short, the securitization of
home mortgages and other assets still has the potential to
produce enormous societal benefits.
That said, we must remember that securitization is only an
engine and not an end in itself. Like other engines, for it to
run as intended, securitization needs strong, reliable inputs,
responsible operators, and clear rules of the road. In the case
of the subprime crisis, we failed on all three fronts.
Wall Street's insatiable demand for subprime mortgages
fueled a Frankenstein-like engine that allowed originators to
hit full throttle and bundle tens of thousands of toxic
mortgages without regard for the consequences.
At the same time, regulators ineptly monitored these
activities, underwriters dangerously relaxed standards, and far
too many investors failed to fully understand the purchases
they made.
Perhaps most troubling, the gatekeepers to our markets,
credit rating agencies, negligently if not recklessly stamped
nearly everything with a AAA. Their widely inappropriate
investment grades nearly drove our economy off a cliff.
Before life settlements have the chance to give
securitization another black eye, we ought to consider the need
for additional safeguards. Today's hearing will therefore focus
on whether or not life settlements are an appropriate input for
the securitization engine, or whether or not its operators can
appropriately drive this vehicle.
Life settlements can provide retirees with a source of
liquidity to fund unexpected expenses or to sell an asset that
they no longer need at a better price. But this industry also
has the potential for substantial abuse. Presently, States
inconsistently regulate life settlements. Many States have also
failed to require the registration of life settlement brokers.
Moreover, because of the opaqueness of life expectancy
estimates, some investors in life settlement funds have already
lost money on inaccurate predictions. The financial gains made
by a select few middlemen from the transaction costs related to
life settlements are also estimated to be 4 times that
associated with the sale of masterpiece paintings.
In sum, we face many problems with this budding industry.
The improper securitization of life settlements could
ultimately leave countless seniors penniless and innumerable
investors broke. The idea of institutional investors profiting
from a person's death also seems, to say the least, unsettling
and immoral. It leads us down a slippery slope that might
eventually result in indexes based on divorce rates and swaps
tied to gambling losses.
We are hopefully now emerging from the worst recession of
our time. This committee is also working diligently to
strengthen the regulation of our financial system to withstand
future crises. It is in this spirit of reform that we should
examine the life settlement industry and its connections to our
securities markets. By doing so today, and before we face
another crisis, we may also decide that the best policy is to
keep this Pandora's box shut.
I will now recognize Mr. Garrett for 5 minutes.
Mr. Garrett. Thank you, Mr. Chairman.
And thank you to all the members of the panel and on the
additional end table of the panel here as well.
I thank the chairman for holding this hearing today.
You know, due to the problems that we have experienced over
the last couple of years in the secondary mortgage market, it
is really timely and appropriate that this subcommittee fulfill
its role and conduct proper oversight over any new advances in
securitization and how these new advances in securitization
might affect consumers and investors.
Now, the main asset class that we are focusing on today is
life insurance settlements. These products have been around, as
you all know, since the 1980's, and the industry has continued
to grow since its inception. As I understand it from talking to
some of the folks in industry, that looking at an industry
around $31 billion in size, and it is slated to grow even more.
I believe that the number one focus of this hearing today
should be the well-being of our senior citizens and their
families. It is these people that we want to make certain that
we are looking out for.
While we want to do our best to protect the seniors and
their families from any harmful financial products, we really
don't want to limit their consumer choices and deprive the
elderly of ways for them to enhance the current quality of
life.
Prior to the development of the life insurance settlement
marketplace, policyholders really had two options before them
for dealing with their life insurance policies: they could stop
paying the premiums and allow the policies to lapse; or simply
surrender the policy for the cash value that life insurance
would offer. Well, life insurance settlement provides seniors a
third option that they consider while they try to maximize the
value of the assets that they hold.
In some studies I have seen, they have shown that life
insurance settlements routinely offer 3 or 4 times the return
to the policyholder in comparison to simply surrendering it in
for cash value.
So while there are numerous stories out there about seniors
benefiting from this type of settlement, there are other
stories out there we read in the paper about fraud and
malfeasance in the industry.
So I look forward to this hearing today, Mr. Chairman,
about any ongoing initiatives by the States to enhance both
consumers' and investors' protection as well as their privacy
rights of anyone selling these policies.
I am also interested to learn from the NAIC more about
their model life settlement act and how States are applying it,
and whether we need--or whether they need to do anything else
to update that as well. I do believe that transparency and
accountability in this industry must continue to improve.
The other main focus of this hearing today should be to
delve into the concerns that the chairman has mentioned about
securitization of these assets, because, in the wake of the
recent financial market collapse where large problems occurred
and are really still occurring in the mortgage securitization
market, it is really appropriate that we examine other new
forms of securitization that at least have the potential, we
think, to grow and expand.
Now, there is that recent New York Times article, that I am
sure we are all familiar with on this topic, that led a few
people to believe that there is an imminent chance for
explosion of life insurance settlement securitization. But as I
understand it, there have been, to date, only a couple of real
specific securitizations that have occurred in this area of
around $3 billion. And when you consider that the total
outstanding dollar amount of life insurance policies in general
is around $27 trillion, I find it hard to believe that these
few securitizations pose a threat to the broader life insurance
market and industry.
With that said, I do recognize the potential for growth in
this market and this industry, and I do feel it is appropriate
that we take time right now to learn more about these products
before it potentially, if it could, get out of hand, much like
Fannie Mae and Freddie Mac and the GSEs did in the secondary
mortgage market, and Congress just didn't act in time.
I know the SEC recently announced the formation of a task
force to examine these issues, and I do look forward to hearing
what they are doing and considering on a regulatory front,
because, at the end, protecting consumers and investors and
ensuring the integrity of our capital markets are critical
tasks before this subcommittee and this Congress, and I believe
we are moving in the right direction by having this hearing
today. That is why I thank this panel, and I thank the chairman
for doing so.
I yield back.
Chairman Kanjorski. Thank you very much, Mr. Garrett. We
will now hear from Mr. Sherman of California for 3 minutes.
Mr. Sherman. I look at this from four directions.
First, from the standpoint of investors in the securities,
do they understand the investment? Are they marketed correctly?
I would rely on the SEC to make sure that is the case.
Unlike everything else we are doing in this committee, at
least what we are talking about today does not pose a systemic
risk to the entire economy. I would say an investment in a pool
of life insurance policies is no more difficult to understand
than buying the common stock of a life insurance company.
Second is the overall ghoulishness, which is why I think we
are here. But we should keep in mind that there are many
investments in which you benefit from a misfortune. You buy oil
futures, and if Iran blocks the Strait of Hormuz, you sell the
S and P short; and if our economy goes down or you sell short
the stock of a life insurance company; and if people don't live
as long as we currently suspect, you make money. There are
plenty of investments in which the investor makes money due to
the misfortune of others.
Third is from the policy owner's perspective. Let's face
it, life insurance companies are selling whole life and similar
policies as investments, and then when you want to surrender
the policy, they provide you far less than the actuarial value
as the cash surrender value. Policy owners who bought these
investments should try to get as much of the actuarial value of
their investment as possible. The way to do that is to have
people--well, the real way to do it is to have the life
insurance industry dramatically increase cash surrender value
to something approaching actuarial value. But if they won't,
then we have to allow or ought to allow policy owners to sell
their policies to the highest bidder. The more bidders, the
more they will get. And if some of those bidders are involved
in securitization, that brings in more bidders. Otherwise,
people who have paid for decades are going to get only a small
fraction of what their policy is worth.
Finally, from the insurance company's standpoint, I am told
that roughly 90 percent of the policies are surrendered or
abandoned. Obviously, if the cash surrendered value is far less
than the actuarial value, the insurance company makes more
money. Do they pass this on to consumers, or is this just a
profit center for the insurance industry?
I don't know whether Congress should intervene in the
markets to prevent policy owners from getting fair value on the
expectation that means life insurance companies will make more
money and that is somehow good for consumers.
I yield back.
Chairman Kanjorski. Thank you very much, Mr. Sherman.
We will now hear from Mr. Scott of Georgia for 2 minutes.
Mr. Scott. Thank you, Mr. Chairman.
There are certain concerns with the interaction of the life
settlement industry and the securities markets, so this hearing
is very timely, how this interaction will have an impact on
investors and how those investors will actually benefit from
those life settlement deals regarding life insurance. I am
concerned with the standards of underwriting that I believe, as
we move forward in looking at all areas of the financial
service industry, we must remain focused on the very important
aspect of transparency. Also, when assets are securitized, it
gives investors new hurdles in addressing the authenticity of
the policy.
Securities and Exchange Commission Chairman Mary Schapiro
has expressed her own concerns over the role of securitization
in life settlements and believes that there are many questions
to be asked relating to sales and practice and privacy rights,
serious questions. The interaction of the life settlement
industry with securities markets raises the question of, how
will investors be protected? We certainly need answers to that
question. Should we more intently focus on the transparency of
underwriting standards used as well as mortality estimates?
Does the securitization of life settlement produce unintended
consequences for the State guarantee funds, especially if more
policyholders obtain life settlements and fewer life insurance
policies lapse? These are very serious questions that we have
to examine. The hearing is very timely, and I look forward to
each of your presentations.
Thank you, Mr. Chairman.
Chairman Kanjorski. Thank you very much.
I will now recognize the gentleman from Florida, Mr.
Grayson, for 3 minutes.
Mr. Grayson. Santayana said, ``Those who cannot remember
the past are condemned to repeat it.'' So it certainly is
important that we learn from history, but it is also important
that we learn the real lessons of history and not delude
ourselves.
For instance, some people have adopted the view that
securitization must be evil, because when we started to
securitize, we ended up with great economic problems.
I have a really different point of view about that. I don't
think there is anything inherently wrong with securitization at
all. I don't think there is inherently anything wrong with
securitizing any kind of asset. It depends on how you do it.
So if those people who believe that securitization is evil
come to dominate our economy, then the result of that will be
that we will miss out on the economic opportunities that good
financial reform can provide to us. So if you came here today
to try to convince us that we should shut down life settlement
securitization, I am not going to be with you.
However, we do need to learn from our experiences. And one
thing we have learned is that monopoly is not good.
In the case of life insurance policies, there has a
monopoly buyer of life insurance policies that are in
existence. It is the issuer. The issuer is the only one who can
buy back from you except for the life settlement companies.
They are the only competition that is provided to the issuer in
a situation like that. So when we have a monopoly, when we have
a monopsony, actually, the result of that is that the
policyholder doesn't get fair value for that policy. And we
have seen that over and over and over again.
What we want is we want an industry that provides
competition. Life settlement actually is an industry that
promotes and provides competition and provides value to the
holders of these insurance policies they wouldn't otherwise
have.
When we look back on the experience of the last couple of
years, the real enemy, as I see it, is the enemy of leverage.
It is the enemy of zero capital requirements or insignificant
capital requirements. In the case of AIG, there were no capital
requirements. They could issue anything they want and call it
some kind of insurance policy, and they didn't have to have any
reserve requirements at all. No capital requirements, no
reserve requirements. AIG blew up, and it cost each one of us,
every American, substantial amounts of money.
In the case of Fannie Mae, Fannie Mae had 200 to 1 leverage
and that is why Fannie Mae blew up. Not because Fannie Mae was
securitizing mortgages, but rather because Fannie Mae was
abusing the concept of leverage by 200 to 1 leverage.
Now, ask yourself, how does that apply here to the life
settlement industry? What is the leverage in the life
settlement industry? It is zero. The life settlement industry
doesn't revolve around borrowed money at all. So it simply
doesn't present to us the same kind of policy issues as the
unbridled abuses that came with 200 to 1 leverage and estimated
leverage.
So as I look at this, I say to myself, what this industry
is doing is it is helping people get the full value of their
policies. And I don't think that this industry should be called
upon to answer for the serious abuses that pervaded this
economy in other areas over the past 2 years. And the sins of
others should not descend on you.
Thank you, Mr. Chairman.
Chairman Kanjorski. Thank you very much, Mr. Grayson.
Now we will have an introduction of the panel.
Thank you all for appearing before the subcommittee today,
and without objection, your written statements will be made a
part of the record. You will each be recognized for a 5-minute
summary of your statement.
First, we have Ms. Paula Dubberly, Associate Director,
Division of Corporation Finance, United States Securities and
Exchange Commission.
Ms. Dubberly.
STATEMENT OF PAULA DUBBERLY, ASSOCIATE DIRECTOR, DIVISION OF
CORPORATION FINANCE, U.S. SECURITIES AND EXCHANGE COMMISSION
Ms. Dubberly. Good afternoon, Chairman Kanjorski, Ranking
Member Garrett, and members of the subcommittee.
I am pleased to testify on behalf of the United States
Securities and Exchange Commission on the topic of life
settlements and new developments in securitization. I
appreciate the opportunity to discuss with you the Commission's
work in this area.
We recognize that securitization plays an important role in
the financial markets. However, recent experience with
securitization in the mortgage markets argues for the careful
review and analysis of all developing securities activities. In
this regard, the Commission is taking steps to address issues
with securitization. The staff currently is engaged in a broad
review of the Commission's regulation of asset-backed
securities, including disclosure, offering process, and
reporting by asset-back issuers. The securitization market
continues to develop, and we recognize that securitization of
life settlement appears to be a growing practice.
Life settlements generally are considered securities when a
third-party purchaser sells a fractional interest in a single
policy or pools the life settlements and sells interests in the
pool through securitization. To date, we are not aware of any
securitized life settlement pools being registered with the SEC
and publicly sold to investors. But securitized pools are sold
as private placements, and we will continue to monitor this
developing area. The SEC has the ability to use its civil
enforcement authority to combat fraud and other unlawful
securities-related activity in this market and has done so. The
Commission has brought a number of cases in this area since the
mid-1990's.
In light of the potentially far-reaching consequences of
the recent movement towards securitization of life settlements,
Chairman Schapiro has established a multidisciplinary Life
Settlements Task Force comprised of senior officials from
throughout the SEC. The task force will examine emerging issues
in life settlements and advise the Commission whether market
practices and regulatory oversight can be improved. The task
force will consider, among other things, the application of the
Federal Securities laws to life settlements, the emerging role
of securitization, the life settlements marketplace, including
trading platforms, and market intermediaries.
Various groups of investors are affected by life settlement
securitizations, including investors and the companies that
sponsor the securitizations, investors in insurance companies,
and investors that purchase securities backed by life
settlements. Not only will the staff be looking at the issues
raised with respect to these groups, but we will also be
looking at the disclosure provided to these groups of
investors.
We also will consider sales practices regarding both the
sale of existing life insurance policies by contract holders
and the sale of interest in life settlement pools to investors.
The Commission is especially concerned that life settlement
brokers may be targeting policyholders who are particularly
vulnerable to abusive sales practices, including seniors and
the seriously ill. We will consider possible issues raised by
the business model of creating securitized pools of life
settlements, how that model relates to the interest of
investors, and what kinds of fees are generated for
securitizers. We also will consider whether securities
offerings that purport to rely on exemptions from registration
under the Federal Securities laws are doing so properly.
Life settlement issues draw on the expertise of regulators
throughout the United States. Thus, Chairman Schapiro has asked
the task force to reach out to regulators and other interested
parties to coordinate regulatory efforts and analyze whether
gaps in oversight exist that could be filled through
legislation or other action.
By incorporating a multidisciplinary approach and working
with fellow regulators and other interested parties, the Life
Settlement Task Force will make a fresh in-depth analysis of
the issues raised in the securitization and life settlements
market so that we can make sure investors are informed and
protected.
Thank you again for inviting me to appear before you today
and for the subcommittee's support of the agency at this
critical time for the Nation's investors. I would be happy to
answer any questions you may have.
[The prepared statement of Ms. Dubberly can be found on
page 51 of the appendix.]
Chairman Kanjorski. Thank you very much, Ms. Dubberly.
Next, we will hear from the Honorable Susan E. Voss,
commissioner, Iowa Department of Insurance, on behalf of the
National Association of Insurance Commissioners.
Ms. Voss.
STATEMENT OF THE HONORABLE SUSAN E. VOSS, COMMISSIONER, IOWA
INSURANCE COMMISSION, ON BEHALF OF THE NATIONAL ASSOCIATION OF
INSURANCE COMMISSIONERS
Ms. Voss. Chairman Kanjorski, Ranking Member Garrett, and
members of the subcommittee, thank you for this opportunity to
testify at today's hearing.
My name is Susan Voss and I am the commissioner of the Iowa
Insurance Division. We have jurisdiction over insurance and
securities regulation through my division. I am also the vice
president of the National Association of Insurance
Commissioners, and I am here today on behalf of the fellow
regulators of the NAIC. I want to commend the subcommittee for
today's hearing assessing the impact of securitization on life
settlements.
The first life insurance settlement was developed as a
viatical settlement during the 1980's in response to the HIV/
AIDS patients who wished to sell their life insurance policies
in order to raise much-needed funds for personal and health
care expenses. Today, the marketplace has expanded to roughly
$3 billion to $4 billion annually, so that individuals who no
longer need or want their coverage for economic or personal
reasons can sell their policies as an alternative to
surrendering it for its cash value or letting it lapse.
Life settlements are necessary transactions for some
consumers, but they require appropriate regulation with a focus
on disclosure and consumer protection. As such, nearly all
States have moved to pass regulations or laws specifically
establishing strong oversight of life settlement transactions.
But it is important to note that all States have the authority
to protect consumers from fraud and misrepresentation in this
area.
All State insurance regulators enforce licensing and form
requirements and have examination enforcement authority and
require mandatory disclosures to the consumers about his or her
rights. This oversight is critical, particularly as stranger-
originated or owned life insurance, or STOLI, has emerged in
recent years. Under STOLI, investors solicit a healthy and high
net worth individual, who is typically at least 70 years of
age, to obtain a life insurance policy with a certain minimum
death benefit. The individual buys the insurance with the
specific intent of selling it to those investors. And after a
minimum period of incontestability ends, ownership of the
policy is transferred in exchange for a taxable lump sum. The
investors then receive the death benefit when the insured
individual dies.
This concept violates State insurable-interest laws that
require a direct interest and relationship between a
policyholder and beneficiary, but it is difficult to determine
a policyholder's true intent when purchasing a policy, making
it challenging to distinguish between STOLI and a legitimate
life insurance settlement.
As such, the States are implementing requirements to target
the timing of these transactions to make them unappealing to
would-be STOLI investors while preserving a policyholder's
right to sell his or her policy. Likewise, insurers are
improving their underwriting guidelines to better determine a
policyholder's intent when purchasing life insurance.
As you can see, State regulators already conduct
significant oversight of life settlement transactions. However,
the concept of securitizing life settlements is a relatively
new phenomenon. While such securitization is outside the
jurisdiction of insurance regulators, we are concerned that
securitization of life insurance settlements would incentivize
would-be STOLI investors to attempt to expand the marketplace,
much as securitization of mortgages helped dramatically expand
that marketplace.
It is also important to note that life settlements in
general and securitization of them in particular would diminish
the number of life insurance policies that would otherwise
lapse, requiring insurers to raise their premiums.
Finally, we would want to ensure that any securitization of
life insurance settlements does not compromise the original
policyholder's rights and privacy. We commend the SEC for
creating their agency-wide task force regarding life
settlements, and we would like to work with them on this
critical issue. This issue is a clear example of where
securities and insurance regulators need to work
collaboratively to ensure that policyholders and investors are
informed and protected.
Mr. Chairman, thank you again for the opportunity to
testify before this subcommittee, and I welcome any questions.
Thank you.
[The prepared statement of Ms. Voss can be found on page 97
of the appendix.]
Chairman Kanjorski. Thank you very much, Ms. Voss.
And now, Mr. Green of Texas will introduce our next
witness.
Mr. Green?
Mr. Green. Thank you, Mr. Chairman. I thank you for
allowing me to be a part of the subcommittee.
I am honored today, Mr. Chairman, to introduce Mr. Brian
Pardo, who is the founder, the president, the chief executive
officer, as well as the chairman of the Board of Life Partners
Holdings. He is also a person who has served his country,
having been a veteran in the Vietnam war.
Mr. Chairman, I believe we will find his testimony to be
informative, insightful, and engaging.
And I will yield back to you, Mr. Chairman.
Chairman Kanjorski. We are a little out of order here, but
that is the way it goes. We will be right back to Mr. Dorsett.
Mr. Pardo.
STATEMENT OF BRIAN D. PARDO, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, LIFE PARTNERS HOLDINGS, INC.
Mr. Pardo. Thank you, Mr. Chairman, and Ranking Member
Garrett. It is a privilege for me to be here. It is a privilege
to be here to provide you with our company's insight into the
need, especially in today's financial environment, for uniform
regulations with Federal oversight of this asset class to
provide older Americans unimpeded access to the market and to
provide investors with a reliable asset-based investment which
is not correlated to financial markets and/or other types of
indices. I am going to skip part of this.
The severe recession and the meltdown has caused severe
financial problems, especially in IRA, 401(k), and other
retirement accounts for senior Americans. The purpose of life
settlements as we see it is simply to provide these people
access to cash many never knew was available to them. Of all
the life insurance in force today, only approximately 8 percent
make up these kinds of policies. So we do not see that this is
a problem to the life insurance industry. These special-purpose
policies are usually universal life policies. Since they are
not purchased for wealth accumulation, policyholders usually
only pay a minimum amount of premiums to keep their policies in
effect. The surrender value on these types of policies is
typically 1 percent or less of the value of the policy.
The Wall Street Journal reported last fall that, with a
life settlement, policyholders can typically net more than is
available by surrendering a policy to the insurer for a lump
sum payment, or in the case of letting it go entirely, letting
it lapse, in other words, getting nothing for it.
This has been a policyholder's right since the 1911 court
ruling of Grigsby v. Russell, which allowed people to sell
their life insurance policies and consider life insurance
policies personal private property. And along that regard, I
would like to point out that as a personal property asset, the
sale of this asset has been ruled by the courts as not the
business of insurance.
Currently, life settlements are regulated by a patchwork of
State insurance departments. Each claims jurisdiction to
regulate the transactions with inconsistent and frequently
conflicting statutes which vary from State to State. Some
States have regulations which effectively prevent insurance
consumers from any access to the secondary life insurance
market, while a few have no regulations at all.
Life Partners is domiciled and registered in the State of
Texas, and as a life settlement provider, we are licensed and
regulated by the Texas Department of Insurance. All forms are
approved and require us to file annual copies.
On top of that, the lack of uniformity in State regulation
creates another problem. A lot of times the participants in the
life settlement transaction may involve persons or entities
throughout the United States. For example, the life settler who
may be selling the policy may be a trust under the laws of New
York with a trustee in Connecticut, while the insured may live
in Arizona. Determining which State has jurisdiction over the
transaction can be very confusing. Federal oversight regulation
can remedy this problem.
Life settlement transactions are not derivatives, and when
the investor actually obtains ownership of the policy or a
fraction of the policy, life settlements are not a security
either, as the lady pointed out here. It is merely an
assignment of the value of a contract right. However, as with
many types of assets, the securitization of life settlements is
very possible, and indicated by the recent news articles in the
Wall Street Journal, Wall Street is looking at life settlements
as a replacement for mortgage-backed securities.
This is nothing particularly new. In 2000 through 2003, the
industry--Wall Street, that is, opted out of this class because
it couldn't see how to transform it into a derivative. To the
extent life settlements are bundled and transformed into
derivative securities, they would be subject, of course, to the
statutes and regulations governing securities.
In order to provide older Americans with unfettered access
to the valuable secondary market for the life insurance
policies, a uniform minimum level of Federal regulation for
life settlement transactions in the United States, in our
opinion, is advisable. Life insurance and settlement providers
should not shy away from Federal regulation. Life Partners
actually went public in 2000, not to raise capital, but to
voluntarily bring itself under meaningful oversight and
regulation required by public companies. We are the only public
company as a life settlements provider in the United States,
and as such, we are subject to the reporting requirements of
the SEC, including those rules mandated by the Sarbanes-Oxley
Act of 2002.
I strongly believe that Federal law should set a minimum
standard for State regulation of life settlements. If a State
does not provide at least this minimum level of regulation, I
believe that the new U.S. Consumer Financial Protection Agency
should supervise life settlement activity in that State,
because life settlement transactions are not the business of
insurance but rather a financial asset transaction, so they do
not constitute the business of insurance. Thus, any Federal
regulation of life settlements does not run afoul of the public
policy expressed in the McCarran-Ferguson Act.
Thank you very much, and I will certainly be happy to
answer any questions.
[The prepared statement of Mr. Pardo can be found on page
85 of the appendix.]
Chairman Kanjorski. Thank you very much, Mr. Pardo.
And next, we will hear from Mr. J. Russel Dorsett, co-
managing director of Veris Settlement Partners, on behalf of
the Life Insurance Settlement Association.
Mr. Dorsett.
STATEMENT OF J. RUSSEL DORSETT, CO-MANAGING DIRECTOR OF VERIS
SETTLEMENT PARTNERS, ON BEHALF OF THE LIFE INSURANCE SETTLEMENT
ASSOCIATION
Mr. Dorsett. Good afternoon, Chairman Kanjorski, Ranking
Member Garrett, and members of the subcommittee.
My name is Russel Dorsett, and I am delighted to have the
opportunity to appear before you representing the Life
Insurance Settlement Association, or LISA. LISA is the oldest,
largest, and most inclusive body serving the life settlement
industry, and it is an honor and a privilege to serve as LISA's
president.
LISA's mission is to promote an orderly and transparent
marketplace, sound regulation, and best practices to enable
well-informed consumers to maximize the value of a financial
asset, a life insurance policy which is no longer needed,
wanted, or in some cases, affordable. LISA members hold nearly
75 percent of all the provider licenses which have been issued
by the State regulators.
The average life settlement pays policy owners 4 to 6 times
the policy's cash value. Over the past decade, the life
settlement industry has delivered to policy owners
approximately $6 billion above what they would have received
had they simply lapsed or surrendered their policy. In doing
so, we have made it possible for these policy owners to better
afford retirement, medical care, or simply to enjoy the
lifestyle they have earned.
Life settlements are not about Wall Street. They are about
a consumer's property rights. A famous decision in 1911
authored by Justice Oliver Wendell Holmes affirmed the right of
a legitimate policy owner to treat their policy as financial
property and to sell to the highest bidder if they so desire.
This appearance is occasioned by the committee's concern
that the growth of the secondary market and the potential for
securitizations might somehow be seized upon by Wall Street's
rocket scientists and grow to the point where it constitutes a
systemic threat to the American economy or to the health of the
life insurance industry. We are a niche residing rather
uneasily between two colossuses, the institutional capital
markets and the life insurance industry. In comparison to
either, the life settlement market is miniscule. In the best of
times, perhaps $3 billion to $4 billion of capital was actually
employed to purchase policies, which might translate to $10
billion to $12 billion in face amount purchased in any one
year. While this is certainly not an inconsequential sum, it is
tiny in comparison to the $20-plus-trillion mortgage market or
the life insurance industry, which has some $19 trillion of
face amount in force; we think about $10 trillion of that is
individual policies.
Consumers attempting to utilize the life settlement option
have suffered from the current financial crisis. Completed life
settlement transactions during calendar year 2009 will, at
best, approach 50 percent of those completed in the prior year
primarily due to the dearth of investment capital available to
purchase policies. In the 5 years preceding the financial
crisis, however, the secondary market did experience sustained
growth driven both by increased awareness on the part of
consumers that such an option existed and the undeniable appeal
of life settlements as an asset class.
Securitization of life settlements has been a topic of
considerable interest for some time, but the number of
transactions actually completed can be counted on one hand, in
fact, with several fingers left over.
Demographic trends alone make it certain that more and more
Americans will find themselves in a position where a life
settlement becomes a valuable option. But a viable market
requires both willing sellers and credible buyers. To the
extent the securitizations are underwritten in a financially
sound and transparent manner and, in so doing, increase the
capital available to purchase unaffordable, unneeded, or
unwanted life insurance policies, we cannot help but believe
that both social and economic utility are indeed enhanced.
Even under the most optimistic growth scenarios, only a
very small fraction of the insured population would ever
qualify as a candidate for a life settlement, and the total
face amount of policies purchased is unlikely to even approach
$200 billion over the next decade. While this is a substantial
sum, it is several orders of magnitude away from the potential
for creating systemic problems comparable to those experienced
in the mortgage markets.
The potential impact of life settlements on insurers is
also negligible, and the settled policies are unlikely to
approach even a fraction of 1 percent of the insurance enforced
over the foreseeable future.
We believe that life insurance contributes greatly to
society at large. It is a well recognized engine for wealth
creation, and it helps to foster a culture of self-reliance and
planning for the future. A secondary market for those policies
which become at some point unneeded or unwanted enhances the
already tremendous value proposition that life insurance
represents. It will result in more people buying more policies
and keeping them for longer. Should their health decline or
they reach an age where they need the money now rather than
later, the life settlement option can provide funds to meet
their needs at a time when other assets may have been depleted
or declined in value due to adverse market conditions.
Thank you again for the opportunity to appear before you
today, and I will happy to answer any questions that anyone
might have. Thank you.
[The prepared statement of Mr. Dorsett can be found on page
43 of the appendix.]
Chairman Kanjorski. Thank you very much, Mr. Dorsett.
Next, we will hear from Mr. Jack Kelly, director of
government relations at the Institutional Life Markets
Association.
Mr. Kelly.
STATEMENT OF JACK KELLY, DIRECTOR OF GOVERNMENT AFFAIRS, THE
INSTITUTIONAL LIFE MARKETS ASSOCIATION
Ms. Kelly. Thank you, Mr. Chairman.
Thank you, Mr. Garrett.
My name is Jack Kelly. I serve as director of government
affairs for the Institutional Life Markets Association, ILMA, a
trade association comprised of a number of the world's leading
institutional investors and intermediaries in the longevity
markets. Our members include Credit Suisse, EFG Bank, Goldman
Sachs, JP Morgan Chase, Mizuho International, and WestLB.
ILMA was formed 2 years ago to create best practices and to
encourage transparency and standardization of documentation,
and to encourage and educate consumers and investors and
policymakers about the benefits of longevity-related
marketplace. ILMA members, through lending or by direct
purchase, have provided consumers in excess of $2.9 billion
through purchases of life insurance policies no longer needed
by the owners.
ILMA's first action was the creation of the Life Settlement
Transaction Disclosure Statement that clearly discloses the
amount of money consumers receive when they sell their life
insurance policy, and how much money their broker will receive
in the transactions. ILMA has advocated in every State that has
considered life settlement legislation to adopt this form. It
has also created a set of uniform HIPAA-compliant release forms
to ensure the participants in the market use forms that protect
the identity and the personal privacy records of individuals.
It is difficult to determine the actual size of the life
settlement market. An upcoming report by Conning Research
concludes the value of policies settled in 2008 to be $12
billion, and at the end of 2008, approximately $31 billion of
policies will be in force. They conclude, by 2011 and 2012, the
market will reach a saturation point with an annual growth
after that of 2 percent to 3 percent. Compare this to the
almost $20 trillion to $25 trillion in force today of life
insurance. The size of the life settlement market is less than
miniscule.
Recent news reports have advanced the story that the
capital markets have initiated an effort to issue rated
securitization of life settlements. I think it is important to
distinguish between facts and speculation in this reporting.
As for life settlement securitizations, there have only
been two rated life settlement securitizations reported: In
April 2009, an internal company transaction by AIG that was
valued at $2 billion and rated by A.M. Best. This capital
relief transaction was done in part to reduce some of AIG's
ongoing borrowing from the Federal Reserve by $1.2 billion.
In 2004, Legacy Benefits Corporation concluded a Moody's
rated securitization that included both life settlements and
annuity assets. Since these are the only known transactions, it
brings to question why suddenly there is such increased
attention to the securitization of life settlements.
As the use of securitization by the insurance industry is
widespread, it is only reasonable that such a tool would be
explored for life settlements. In fact, Frank Keating, the
president of ACLI, recently stated: ``Securitization of life
insurance policies transferred to third parties is not
necessarily a bad thing.''
The analogy presented by some that life settlement
securitization is the next subprime crisis is completely
inaccurate. The most significant participants in mortgage
transactions are the homeowner and the investor. Securities
that were linked to subprime mortgages relied on a continued
stream of payments by the homeowners. When homeowners failed to
make payments, the securitizations failed, resulting in two
losers, the homeowner and the investor.
In a life settlement securitization, an investor buys a
security backed by a pool of insurance policies that have been
settled. It is critical to note that the original owners of the
insurance policies are paid in full for the policy at the time
their ownership is transferred. They have no further financial
participation in the process and cannot be adversely impacted
as a result of the securitization. If the life settlement
securitization fails, the only loser would be the investor,
which is the case in all investments, and there would be no
financial impact on the insured or any original policy owner.
Accordingly, such investments would only be suitable for
institutional investors who can analyze and understand the
risks.
ILMA's position is that life settlement transactions should
be regulated to ensure that the consumer is protected and
informed about the impact of such transaction, and we have
argued for these protections in every State. As life
settlements are regulated by State insurance regulators, there
is a lack of uniformity in the laws governing these
transactions. ILMA seeks the adoption of uniform laws and
including all requirements of that uniformity.
We look forward to working with you, Mr. Chairman, and the
members of the committee, and thank you for your time today.
[The prepared statement of Mr. Kelly can be found on page
73 of the appendix.]
Chairman Kanjorski. Thank you, Mr. Kelly.
And next, we will hear from Mr. Kurt Gearhart, global head
of regulatory and execution risk, Life Finance Group, Credit
Suisse.
Mr. Gearhart.
STATEMENT OF KURT GEARHART, GLOBAL HEAD OF REGULATORY AND
EXECUTION RISK, LIFE FINANCE GROUP, CREDIT SUISSE
Mr. Gearhart. Thank you.
Good afternoon. My name is Kurt Gearhart, and I am Credit
Suisse's global head of regulatory and execution risk in the
firm's Life Finance Group. The Life Finance Group employs
approximately 90 professionals, and the group's mandate is to
intermediate mortality and longevity risk.
Credit Suisse has been an active participant in
securitization markets, with considerable experience with
insurance securitizations. Based on this experience, we would
like to make three points today:
First, insurance securitizations are nothing new. And, as
described in our written testimony, there are various types of
securitization structures that have been used by the life
insurance industry, with none of the experiences of the
mortgage markets. Securitizing life settlements would be
similar to other traditional insurance securitizations. Credit
Suisse has never in fact done a life settlement securitization,
so we have no direct experience to offer in that area.
Second, Credit Suisse conducts its life settlement business
in complete conformity to industry best practices. We have been
a leader in creating industry best practices, and we believe
that they protect consumers as well as institutional investors.
Finally, Credit Suisse welcomes greater Federal regulation
of life settlements. We would be pleased if a strong Federal
regulator, such as the SEC, were given jurisdiction over life
settlements.
We appreciate the committee's invitation to be here today,
and our discussion will be divided in three parts: life
settlements; life insurance securitizations and Credit Suisse's
activity in life settlements; and the regulation of life
settlements and life settlement securitizations.
Life insurance securitizations. I think that it is
important to understand that securitization of longevity and
mortality risk is not a new concept. Over the last decade,
insurance companies have securitized these risks in closed
block; redundant reserve; embedded value; and extreme mortality
securitizations, as described in our written testimony.
Although Credit Suisse has never done a life settlement
securitization, they would be similar to other life insurance
securitizations. The only difference is that a life settlement
provides income to consumers rather than to the life insurance
companies themselves.
The reality is that there have been very few life
settlement securitization deals. And although we expect the
securitization market to be relatively small, we believe that a
potential securitization market can be good for consumers and
institutional investors.
For consumers, securitization will bring two primary
benefits. First, increased liquidity to the life settlement
market will result in higher cash offers for policy. Second,
securitizations would ensure the protection of the insured's
privacy as institutional investors will not have access to any
information that would allow them to identify the insureds.
For institutional investors, life settlement
securitizations provide a tool for portfolio diversification
and satisfy demands for investments that are not dependent on
capital markets.
The next topic I will discuss is Credit Suisse's activity
in life settlements. Credit Suisse began participating in life
settlement market in 2006, initially by purchasing policies
through third-party life settlement providers. In 2007, we
formed our own licensed life settlement provider to purchase
policies. We opted to form our own platform to ensure the
quality of the policies we acquired and to provide adequate
protection to policy sellers. We employ numerous best practices
in our business, including requiring policy sellers to be
represented by an adviser, providing comprehensive disclosures
to policy sellers and insurers that identify all the risks and
alternatives to life settlements, and disclose all the
transaction fees paid to third parties so the consumer knows
exactly how much we are paying for their policy. And, we
conduct closing interviews with both the policy sellers and the
insureds to ensure that they understand the substance and
economics of the transaction.
Credit Suisse has paid approximately $500 million more to
seniors than they would have otherwise received by surrendering
their policies to the insurance companies. On average, we pay
policy sellers approximately 10 times more than the cash
surrender value offered by the insurance companies.
Seniors typically sell their policies to Credit Suisse
because premiums become unaffordable, or because they need
funds for health care, retirement, or other purposes. We manage
and distribute the mortality and longevity risk with
sophisticated institutional investors, including insurance
companies, reinsurance companies, fund managers, and pension
funds. We employ rigorous risk management practices to limit
the amount of exposure we have in the life settlement business.
Finally, I would like to discuss the regulation of life
settlements and life settlement securitizations. Life
settlements securitizations would be securities subject to SEC
regulation. They would also be subject to any general
securitization reforms currently being considered by Congress.
The acquisition of life insurance policies from policy sellers
is currently regulated at the State by State insurance
departments. We have worked with the NAIC, NCOIL, and States on
life settlement regulation.
Today, 35 States regulate life settlements. Notwithstanding
the efforts of the NAIC, NCOIL, and State regulators, consumers
in 15 States still have no regulatory protection. The State
regulatory model has led to a patchwork of inconsistent
regulation, and this is confusing to consumers and impacts the
effectiveness of regulation.
We have implemented a variety of best practices in our life
settlement business to protect consumers regardless of whether
required by State law. We do this because we value our
reputation and because it protects our institutional investors
who do not want to own assets that were acquired with abusive
practices. Credit Suisse would support Federal regulation and
oversight of this business by the SEC or another Federal
regulator as a means to provide greater protection to policy
sellers, insureds, and investors.
To close my testimony, I would like to restate our three
primary points: First, life insurance securitizations are
nothing new, and while Credit Suisse does not have direct
experience, any application of securitization practices to life
settlements should be the same as traditional life insurance
securitizations; second, we believe strongly in the
implementation of industry best practices; and third, we would
welcome strong Federal regulation from the SEC or another
appropriate Federal agency.
Thank you for the opportunity to appear today. And I will
be happy to answer any questions that you may have.
[The prepared statement of Mr. Gearhart can be found on
page 63 of the appendix.]
Chairman Kanjorski. Thank you very much, Mr. Gearhart.
Next, we will hear from Mr. Steven H. Strongin, managing
director and head of Global Investment Research, Goldman, Sachs
& Company.
Mr. Strongin.
STATEMENT OF STEVEN H. STRONGIN, MANAGING DIRECTOR AND HEAD OF
GLOBAL INVESTMENT RESEARCH, GOLDMAN, SACHS & CO.
Mr. Strongin. Chairman Kanjorski, Ranking Member Garrett,
and members of the subcommittee, we thank you for inviting us
to present our thoughts on recent innovations in the
securitization market and their impact on the financial crisis.
We hope our thoughts prove helpful.
Mr. Green. Sir, would you pull your microphone a little
closer, please?
Mr. Strongin. Is that better? Okay.
I am head of Global Investment Research at Goldman Sachs. I
have been involved either directly or indirectly with the
securitization markets since starting at the firm 15 years ago,
as well as during my tenure at the Federal Reserve in the 12
years prior to that. I am pleased to answer your questions on
behalf of the firm regarding the securitization market and,
more specifically, the life settlement and life settlement
securitization markets.
Before delving into detail on these topics, I would note
that Goldman Sachs has never executed a life settlement
securitization. We currently have no client mandates or plans
to execute one.
In addition, the life settlement business is very small. We
estimate that our total investment in this space represents a
small fraction of the total capital in the market and is very
small relative to what several of our large institutional
competitors have invested. The business is also very small as a
percentage of the firm's total business at considerably less
than one-tenth of 1 percent.
As Goldman Sachs has not executed any life settlement
securitizations, we cannot offer any experience-based view of
the life settlement securitization market, but we do not
believe it poses systemic risks. It is small, unlikely to grow
rapidly, and it is also unlikely to impact things like lending
standards, which can have far-reaching economic consequences.
We believe that the life settlement market offers
significant positive benefits to the insured facing changing
circumstances. That said, it could also have the potential for
consumer abuse. Hence, we would emphasize the need to address
consumer-protection-related issues in this market rather than
systemic ones.
We do have significant experience in other securitization
markets. Based on that experience, we see a few key areas where
securitizations, particularly mortgage securitizations,
increased systemic risk and contributed to the financial
crisis. We believe that the rules and regulations related to
securitization need to be changed to address these problems.
Specifically, some financial firms used the relatively
favorable rules around securitization to reduce the capital
held against poor quality loans. They also made their balance
sheets appear healthier than they were by reporting they were
holding ``good'' public securities rather than the high-risk
loans underlying these securities. This was true even for
securities that had never actually been sold in a market, but
were instead simply repackaged and relabeled with the help of
ratings agencies. In some cases, these rules even allowed firms
to make risks disappear entirely from their balance sheets.
These abuses led to wholesale concerns about the balance
sheet integrity of all financial firms, regardless of whether
they had engaged in such practices or not, and greatly
contributed to the panic at the peak of the crisis. They also
drove the need for widespread massive governmental assistance
for even the most healthy of financial firms.
To address these issues and to make the financial system
more robust to financial shocks, as well as to reduce the
future need for government assistance in times of stress, we
think that securitizations should only qualify for favorable
regulatory treatment after significant parts of all risk
tranches have been sold to a true third party. To prevent
misreporting of risk exposures, large financial holding
companies should consolidate all assets and liabilities onto
their balance sheets and mark those assets to market.
Further, to prevent the regulatory and accounting arbitrage
that allowed massive under- and unreported risks to build and
inflated profits to be reported, the rules around affiliate
transactions should be strengthened. Specifically, assets
should not be permitted to be held off balance sheet, and firms
should not be allowed to cross-subsidize business across
regulatory or accounting boundaries. We believe these changes
in rules would go a long way toward reducing systemic risk.
Thank you. And I look forward to answering any questions
you may have.
[The prepared statement of Mr. Strongin can be found on
page 92 of the appendix.]
Chairman Kanjorski. Thank you very much, Mr. Strongin.
Finally, we will hear from Mr. Daniel Curry, president of
DBRS, Incorporated.
Mr. Curry.
STATEMENT OF DANIEL CURRY, PRESIDENT, DBRS, INC.
Mr. Curry. Thank you, Chairman Kanjorski, Ranking Member
Garrett, and members of the subcommittee. My name is Dan Curry,
and I am president of the U.S. subsidiary of DBRS, one of the
registered credit rating agencies.
Securitizations in the mortgage and credit markets
contributed significantly to the recent global financial
crisis. As the markets continue to recover, policymakers,
regulators, and market participants must understand what went
wrong and take appropriate action to ensure that past mistakes
are not repeated.
However, because our financial markets thrive on
innovation, we must also recognize that a regulatory
environment that prohibits new investment products will
ultimately impede rather than enhance the health of our
economy. Fostering innovation while limiting unnecessary risk
is a delicate task. DBRS commends the subcommittee for tackling
this challenge in the area of securitization of life
settlements.
My testimony today will focus on three areas: An overview
of the life settlement securitizations; the role of rating
agencies in this market; and suggestions for prudent
regulation.
To the best of our knowledge, the volume of life settlement
securitizations has been relatively low and sporadic. However,
there are several factors which may stimulate growth in the
coming years. These include longer life spans, the decrease in
defined benefit retirement plans, and other factors that may
force older Americans to seek alternative sources of cash.
Growth may also be spurred by increased interest in such
products by institutional investors.
The role of a credit rating agency in a life settlement
securitization is to issue an opinion about the ability of a
transaction to repay principal and interest on bonds sold to
investors. These agencies do not purchase or arrange for the
purchase of life insurance policies nor do they structure,
underwrite, or sell life settlement transactions.
Because responding to market proposals is a core part of
part of the service we provide, last year, DBRS published the
methodology for rating U.S. life settlement transactions. This
methodology, which is publicly available on our Web site, calls
for both quantitative and qualitative approaches to review in a
life settlement securitization. It does not, however, involve
the creation of mortality indexes; instead, we rely on publicly
available third-party mortality tables.
Although DBRS has reviewed 14 proposals for life settlement
transactions, so far we have not rated any of these deals, and
our market share remains at zero percent. Only two of these
transactions are currently under active review.
Now, I would like to offer some ideas on prudent
regulation. The turmoil in the securitization markets arose
from a number of factors involving mortgage brokers,
appraisers, homebuyers, underwriters, issuers, arrangers, and
investors. Of course, rating agencies also were to blame since
their methodologies and models failed to keep pace with the
products rated, and the rating process at times lacked
transparency.
DBRS believes that the lessons learned from the recent past
can form the basis for a prudent regulatory basis for life
settlement securitizations. First, there must be a focus on
consumer protection, including mandatory licensing of parties
who buy policies and robust disclosure of information about
those transactions. On the securitization front, those who
structure life settlement transactions should be required to
retain a portion of the risk arising from such details. This
would align their interests with those of investors and promote
safety and soundness in the life settlement market.
DBRS also believes that investors should be given the
information they need to make informed decisions about
purchasing life settlement securities.
We are pleased that the SEC has established a life
settlement task force and we look forward to working with them
in this area.
Finally, we believe that the regulatory regime established
and still being refined under the Credit Rating Agency Reform
Act of 2006 is well suited to ensure the quality, integrity,
and transparency of the credit ratings on life settlement
products.
Thank you. I look forward to answering your questions.
[The prepared statement of Mr. Curry can be found on page
36 of the appendix.]
Chairman Kanjorski. I think we will take my questions, and
then we will move on.
Ms. Dubberly, the task force the SEC is putting together
and taking on, has there been a full examination made of what
authorities under the law you have to regulate these entities,
and do you need any further action by the Congress?
Ms. Dubberly. Thank you, Congressman.
That is one of the issues we will be looking at. The
chairman has directed us to take a broad look at this entire
area and to see if we think there are some types of regulatory
gaps between, say, State regulation or Federal securities law
regulation. We certainly haven't completed that task yet, but
that is one of the mandates of the task force.
Chairman Kanjorski. There is no question, you feel you are
considering this as a security as opposed to insurance; is that
correct?
Ms. Dubberly. When you take life settlements and you pool
them and you securitize it, there is absolutely no question
that is a security.
The issue of life settlement, a participation in life
settlement, the Commission has also taken the position that
that is a security as an investment contract. A separate, just
standalone life settlement would be a different question.
Chairman Kanjorski. Very good.
How many people think we are being premature in even
holding this hearing, and that we should put in any time or
effort into this question? Or is it a question that should be
before the Congress at this time?
Could you show your hands? Those who think we should be
pursuing this, could you raise your hands?
Okay. Those who think we should not be pursuing it?
There is a recent article in Der Spiegel magazine
indicating that there is some disappointment among German
investors that Americans are not dying fast enough.
Do you think we should alleviate that risk and take some
action to discourage that bad feeling? That could cause
international implications.
But seriously, I am interested--if we go to securitizing
death settlements, what would be the outer limits of what we
will securitize?
Does anybody want to take that question?
Mr. Kelly. What would the value be? Are you trying to say
the value?
Chairman Kanjorski. No. What areas should we not
securitize?
I mean, I humorously in my opening statement mentioned the
fact that we could probably structure a policy to involve
divorce. But would it be wise and good public policy to do
that? Or if there is an enterprising individual who at every
wedding day wants to issue the odds that the marriage will last
to 50 percent in 5 years, and lesser percentages thereafter,
and then we could bet on whether it will last a lifetime.
Is that good policy, or are we causing some innate
destruction to some reasonably good values in our society?
I just throw it out to you. My compass is twirling; I want
to get it set.
Mr. Kelly. One of the things, Mr. Chairman, I think that
you are saying, is the fundamental question about insuring
risk; is that correct?
Chairman Kanjorski. If you look at it as only insurance of
risk in the product, the result.
Mr. Kelly. But ultimately that is what the insurance
markets do.
Chairman Kanjorski. But everything can be reduced to risk,
can it not?
What is the risk that I will get 21 at a blackjack table?
Mr. Kelly. Actually, on the top of the table it says the
insurance line when you make your bet.
Chairman Kanjorski. Should we securitize that bet?
Mr. Kelly. I think the insurance industry has used models
with securitization on a regular basis, and where it is
appropriate, they have found a need for it. We have seen that
in the many examples that were provided here today with closed
block, with CAT bonds, with mortality CAT bonds.
So there are any number of insurance options that are
securitized now, and they are securitized at the juncture that
they have a value to the underlying risk that they are
securitizing.
Chairman Kanjorski. I want to throw this out:
Just before I came here, I was making a speech downtown to
a group of regulators; and as we were leaving, I posed the
question to my staff--they have not given me a full answer
yet--but has anybody securitized or made life settlements on
key man insurance on corporations where the key man has already
left the corporation and is no longer there? And if you
securitize that, how close is that to not having an insurable
risk?
I understand corporations can keep the insurance policy
even if the person the policy is on has left the corporate
interest, which shakes me up a little bit.
Mr. Kelly. It goes back to the fundamental fact that there
have only been two known securitizations of life settlements
and neither has included a key man life.
Chairman Kanjorski. But you think it could?
Mr. Kelly. I didn't say I think it could. I said it has
never occurred at this juncture.
Mr. Pardo. I think the multitude of transactions that we
see, in general, whether they are securitized or not, once the
policy has been sold by the insurance company to the initial
insured, the insured--since 1911--then has the right to do what
he wants to with that. If you take away the insured's right to
sell that policy through some mechanism, then you are depriving
him of his private property, his right over private property.
Chairman Kanjorski. But that is all dependent upon if he
has an insurable interest on whomever he has bought the policy
for.
Mr. Pardo. The insurable interest goes to the original
purchase of the policy. I can't take out one on your life and
you can't take one on mine.
Chairman Kanjorski. You could at one time in the United
States.
Mr. Pardo. That was before 1881.
Chairman Kanjorski. Right. We may be able to get you to--is
it Antigua? They are selling policies on other people's lives.
We can find a jurisdiction in the world that is going to do
incredible things, and you will find that they will write a
policy on somebody's life where you have no insurable interest.
Now assuming that they did that, the question is, should
that be able to be securitized and is that good public policy?
Mr. Pardo. I don't think anybody involved in the industry
or anybody sitting at this table would even consider looking at
buying a policy like that, because obviously you would have
problems down the road. So it would solve itself; it is just
not an issue that is going to arise.
The primary issue that I think we should be concerned with
is this patchwork of regulation between the States that is
inhibiting access to the market by seniors. Senior citizens are
in desperate need of liquidity right now because of the market
meltdown. And the one in 2001, don't forget also, that helped
lead in to their problems. So suddenly they find out, gee, I
can sell this policy and I can get back maybe 60 or 70 percent
of what I have paid in--considerable amounts of money.
Keep in mind that in our case, we buy for our clients, the
average face value is $3.8 million. So these are not
insignificant policies; these are large policies. They can get
significant amounts of money, millions of dollars, and it means
a lot to them.
So we have to be careful that we don't take that right away
from them, but we also have to have some clarity in the
regulatory structure.
Chairman Kanjorski. So I take it you are making a pitch
for, if there is a Federal option for insurance, that we
include life settlement insurance in the Federal charter?
Mr. Pardo. I think there has to be some clarity in the law,
and this patchwork of regulations has to be standardized in
some form so that there is more access to the market. Because
we are talking--this is a very strange set of situations when
it comes to consumer law.
What we have here is, the regulated party is the buyer. I
am buying your insurance policy. Normally, in consumer law, you
would be regulated; you are selling it. But actually in this
case, we are being regulated. But we are the buyers. All of us
sitting at this table are the buyers, so why are we being
regulated?
And in a large-scale transaction like this, where everybody
is sophisticated--say the policy is over $500,000--nobody, I
don't think, would disagree with me, here at this table or
anywhere, that if we had more clarity in terms of the
regulations--and I think only Federal, some Federal guidelines
are going to straighten this out as to what the basic rules are
so that we know that every State has a certain set of standard
rules that are the same and not this patchwork of slight
nuances and differences.
And they may argue that we have the right to do what we
want, and we have only made this minor little change over here,
but this minor little change over here requires a fleet of
lawyers to make sure that everybody is in compliance.
So what we would like to see, as a company, and I am sure
for securitization to get started, which is a good thing, I
think, as long as they don't get carried away, is access to the
market.
Chairman Kanjorski. So what I gather is, if we move towards
an optional Federal charter, you want us to make sure we
include life insurance policies that are dealt with; and then
also we want to discourage the use of lawyers in our system.
Mr. Garrett?
Mr. Garrett. Thank you.
So basically we are talking about two different issues
here. We are talking about the securitization issue and life
settlement products in general.
On the securitization issue, you can reiterate for me with
regards to the SEC's position, as far as when you have
securitization, the SEC's responsibility in that area is--
Ms. Dubberly. The SEC has authority over the securities. A
pool of life settlements is a security, so the offer and sale
would come under their jurisdiction.
To date, all of them have been offered privately, not in
registered transactions. So we have less authority over the
disclosure and private transactions than we do in registered
transactions.
Mr. Garrett. You do have some.
Ms. Dubberly. We do have antifraud authority.
Mr. Garrett. So the sale disclosure, marketing, fraud
aspects of those, and if it is registered, then it is a
complete line of authority that the SEC would have?
Ms. Dubberly. They would have to comply with all of our
disclosure rules.
Mr. Garrett. So I was looking at the life settlement
products issued, then, moving over to the next set of issues,
since it sounds as though on the security side, when it is
securitized and registered, we already have the SEC out there
responsible. And we also found the SEC has set up the task
force to look further, so looks like we are going in that
direction. We will see what the end results are, and Congress
can respond if they don't like the results.
So the next step is the life settlement products aspect.
The question there comes to a couple of them. And I will open
this up to a couple of you to answer at the same time, with Ms.
Voss being on the defensive end on one end of it and saying
that things are confusing and inefficient when the State is
involved on the one hand.
But I always guess, on the other side, in light of all the
morass that we have gone through and the problems we have gone
through in the last 12 months, and you consider that,
unfortunately, with all due respect, it was Federal regulators
who were involved with things at the SEC and the other banking
regulators where there are some problems there, I guess hope
springs eternal that this time the Feds will actually get it
all right when you defer to us to actually to get the
regulations in this area.
So, Ms. Voss, I know you wanted to--it looked like you
wanted to make a point with regard to Mr. Pardo's comment.
Ms. Voss. Thank you. I just want to clarify.
Actually, 45 States have some specific regulation of life
settlements; and I think we would readily admit that a life
settlement transaction, in most cases, is an appropriate
transaction, and nobody that is regulating at the State level
wants to deny somebody their property rights.
But we also want to make sure that consumers understand
what they are doing with their insurance, that there is
disclosure, and they know all of the information about how that
transaction happens.
Mr. Garrett. Mr. Kelly raised the point with regard to
something out of the organization, the life settlement
disclosure statement, which you have.
And how many clients are members of the organization?
Mr. Kelly. We have six institutional members of ILMA. And
then we have five allied members.
Mr. Garrett. And how much else out there?
Mr. Kelly. On the institutional side, we represent
probably, I would say, 70 percent of the institutional side
that is active in this marketplace.
Mr. Garrett. So you folks came up with the life settlement
exposure document. That lays it all out there. That is
something, as far as I understand from the NSC, you don't
quite--haven't adopted that as complete disclosure; is that
correct?
Ms. Voss. We have some disclosures in the model log that
States are looking at, and also--the National Conference of
Insurance Legislatures also has a model. So States are looking
at disclosure very carefully.
Mr. Garrett. Is there something that Congress can do in
this area--I don't like us to be the heavy hand on this thing--
but to encourage the States that take the proactive role on
this, to go back and take a look at the--not to say that Mr.
Kelly's organization has the 100 percent answer on these
things, but to open the book up again, as this area begins to
expand, to make sure that we are having as much transparency,
particularly in the area as far as agents' compensation and all
of that information?
As you said, the consumers are really what you are trying
to protect.
Ms. Voss. You make a good point; and any time you want to,
write us a letter and encourage those States who may not have
not adopted the model.
I am also very encouraged with the SEC. I just met with
them this morning on a variety of issues, and I think by us
getting together and talking about our concerns, as investors,
we may come out with a joint agreement on how to, overall,
protect consumers and regulate these products.
Mr. Garrett. I will give Mr. Pardo 10 seconds.
Mr. Pardo. I just wanted to say, Mr. Garrett, if you wrote
that letter, you would be writing it to every single State
because, to my knowledge, no State has adopted that act. They
have adopted parts of the model act, but not all of the model
act.
We agree that disclosure is a good thing, but when we are
talking about sophisticated investors, these are investors who
are exempt by the SEC as accredited investors. People who own
multimillion dollar policies, who have lawyers, who have access
to professional help, don't want to be told by regulators,
quite frankly, what to do with their assets.
And so the ones below, say, $500,000, they do need a level
of protection. But there is a group of people who do not--not
only do not need it, but don't want it.
Mr. Garrett. I see my time is up. I am going to ask one
last question and that is on this line.
Were the Congress to get involved in this area and try to
set up some minimum levels in order to provide the consistency
that--the argument always is, we need consistency across the 50
States. The flip side of that, we often hear from--
particularly, depending on the issue--from one side of the
aisle, is that going to be the floor or the max?
So if you do it on the floor on this side and, for
consistency, you may end up and you still allow the States, in
due deference to the States, to say they can still put on X, Y,
and Z as consumer protections, do you end up with the exactly
what you want? Or do you end up with the worst of both worlds,
the floor and also, still, 50 State regulators?
Nothing against State regulators, but that is the argument
on the other side of that, always.
Mr. Pardo. My feeling from 19 years in the industry is that
we have--the States have a pretty good regulatory system going.
There is not a lot of tweaking that needs to be done here, to
be honest. I think it is just getting a standardization of this
patchwork so that everybody at this table that is on the buy
side of these transactions understands what it is they are
dealing with and for that matter, the sellers understand it as
well.
Mr. Garrett. Maybe that is how we can--if we are not
revisiting in an official capacity or some other capacity,
maybe that is something we should look at to see how we can
encourage to get to that level of standardization, so you do
have that consistency.
Again, I thank the panel for their testimony.
Chairman Kanjorski. Now we will hear from Mr. Green.
Mr. Green. Mr. Chairman, while they are not witnesses, I do
have two State representatives who are here today with Mr.
Pardo. They are Representative Jim Dunham and Representative
Garnet Coleman, and I wanted to acknowledge their presence.
Let us for just a moment continue with what the chairman
started, which was building a record. I am always concerned
about whether or not there is systemic risk, but my suspicion
is that all of the members of this panel will agree that there
is not systemic risk at this time.
If there is someone of the opinion that there is systemic
risk at this time, will you kindly extend a hand into the air?
There is.
Ms. Voss. I think you really have to be careful about the
effects of the securities market on what is happening in life
insurance. And I think when we have these discussions with the
SEC about expanding on the securitization of life settlement,
what does that do in the back end to life insurance companies,
their assumptions on the pricing of these products, that you
could have something that would affect the insurance markets.
So I am giving you a half-hand.
Mr. Green. I take it.
What you are saying is, using the example of AIDS, which,
of course, many persons bought policies assuming that there
would be a life expectancy of a certain number of years; and
then with the drug treatments that became available, the life
expectancy increased and that caused some persons to lose some
of their investment.
Is that the type of example that you are talking about?
Ms. Voss. No. I am talking about, if the securitization of
life settlement becomes a growing product, there is going to be
a greater demand for the settlement of more policies, which
could have an effect on how companies look at their assumptions
when they price these products. And it could have some kind of
an adverse impact; we just don't know at this point.
Mr. Green. I concur with you. But at this moment, would you
see that as a problem today, is my question.
Ms. Voss. Not today.
Mr. Green. Let the record reflect that as of today, we
don't have the systemic risk, but do you agree or disagree?
Perhaps I should say, would you agree that we do need some
consumer protection in the marketplace? And if there is someone
who differs, if you think we don't need consumer protection,
that the market is fine as is, would you kindly raise your
hand?
I would like for the record to reflect that all of the
witnesses are of the opinion that we do need some consumer
protection.
If you think that sophisticated investors should be a part
of this process--and you mentioned sophisticated investors, Mr.
Pardo. Of course, to be a sophisticated investor, one does not
have to have a certain level of intelligence always, but it
also has to do with the amount of capital that one has
available to invest. And you have spoken of sophisticated
investors.
So let me ask Ms. Dubberly and Ms. Voss, if you would, is
there a means by which sophisticated investors--persons who are
not sophisticated investors may become involved in this to the
extent that they can be harmed?
Ms. Voss. If you are talking about the securitization and
then purchase, if in fact you get to a market where the
individual investor may be interested, yes, I think there could
be harm.
Mr. Green. Do you think that this patchwork that has been
alluded to is something that should be addressed because of the
inconsistencies and perhaps the lack of transparency in one
State versus another State? Is this something that we should
address, the patchwork?
If you think that the patchwork is something we need to
address, kindly extend a hand into the air.
All right. Maybe it is easier to do it another way.
If you think that we shouldn't address the patchwork and
leave it as it is, would you extend your hand into the air?
Ms. Dubberly. I have to say that part of the purpose of the
chairman's task force that she has formed on life settlements
at the Securities Exchange Commission is to look at all of the
questions you are asking and do a holistic analysis of the
whole situation.
I don't know that we would have answers to any of those
particular questions at this moment.
Mr. Green. I am in complete agreement with you. But I am
trying to find out from the other experts, are they in
agreement that this should be looked into? I think you are
doing the right thing, but I do want to find out if our other
experts agree.
Is there anyone who is in disagreement? Anyone?
As my time is about to expire, let me ask Mr. Pardo one
additional question.
You were involved with some litigation that has somewhat
helped to define this area. Do you want to have just a comment
on that at this time, Mr. Pardo?
Mr. Pardo. Are you talking about the SEC v. Life Partners?
Mr. Green. Yes, sir.
Mr. Pardo. In 1994, the Securities Administration brought
suit against Life Partners claiming that the purchase of life
settlements for sophisticated investors constituted the sale of
securities. We took the position that it did not.
The ultimate resolution of that case here in Washington,
D.C., at the U.S. Court of Appeals, was that it was not a
security in any rendition or iteration, as they put it in a
U.S. Court of Appeals ruling in July of 1996 and reaffirmed by
the court in December of 1996.
So the U.S. Court of Appeals all the way back in 1996--this
was, however, fact-specific to Life Partners' business model
with it: It was not a security.
But this patchwork I am talking about is that since that
time, some States have chosen to ignore that Federal litigation
and say, oh, well, we don't agree. And it is like me
disagreeing with a cop, I wasn't speeding; I am still going to
get the ticket.
Mr. Green. I will have to yield back because my time has
expired.
Chairman Kanjorski. Mr. Manzullo of Illinois.
Mr. Manzullo. Thank you, Mr. Chairman.
Would anybody here like to see the securitization of these
mortgages governed under the new or the proposed Consumer
Financial Protection Agency? Do you guys know what that is?
Do you know what that is, Mr. Pardo?
Mr. Pardo. I am sorry. I am a little hard of hearing.
Mr. Manzullo. Have you heard of the proposed Consumer
Financial Protection Agency?
Mr. Pardo. Yes, of course, I have.
Mr. Manzullo. Would you like to be regulated by them?
Mr. Pardo. I think they should have a regulatory role, some
oversight of life settlement, yes, I do.
Mr. Manzullo. Do you know what they would do?
Mr. Pardo. I hope they would do what Congress asked them to
do.
Mr. Manzullo. That is not what an agency does. The first
thing that they would do is, they would tell you the minimum
amount that you can buy a policy for.
Mr. Pardo. I do not believe that you can price fix, either
the government or privately. Are you talking about putting a
minimum?
Mr. Manzullo. You bet. They will come in with life ratings
and take a look at the product and take a look at the premium
and the amount.
Mr. Pardo. What is going to happen there, Congressman, if
that happens, you are going to then be denying the market to
the owner of the policy because if that doesn't agree with our
numbers--and I am talking collectively at this table--the
policy is not going to get bought.
Mr. Manzullo. I am just saying, I am against this
organization, but that is exactly what they will do because
they want to make sure that the consumer gets a fair price for
the product. They will find some way to do that.
I don't think you want that, do you?
Mr. Pardo. Not that, no.
Mr. Manzullo. Be careful what you ask for when you want the
Federal Government involved in this stuff.
Ms. Voss, when you were saying that you know of no State
that has adopted the model disclosure, you were shaking your
head. Ms. Voss; is that correct?
Ms. Voss. The model act has been introduced and passed in
many States, including Iowa, and there are two different
versions of regulation of life settlement that are out there.
We have 45 States that have some version of the different
models that have been enacted. So, yes, there is regulation out
there.
Mr. Manzullo. But you disagree, Mr. Pardo?
Mr. Pardo. Yes, I would disagree. There are variations of
regulations, and most States do regulate. But my statement was
that no State has adopted the total model act, which they
started working on in about the early 1990's.
Mr. Manzullo. They have adopted the disclosure.
Ms. Voss. We are happy to get you all of the different
details of all of the different States and what they passed.
And we updated that model in 2007, and many States have adopted
it and even made it better, working with the life settlement
industry to make sure it was appropriate.
Mr. Manzullo. So you guys disagree with each other,
correct?
I want to get some life into this boring hearing.
Mr. Pardo. The parts that have been adopted have been fine.
But I am saying if you got the impression from the Commissioner
from Iowa that all of the recommendations have been taken up by
every single State, I don't think that is true.
Mr. Manzullo. But you want the Federal Government to
preempt that and come in with something?
Mr. Pardo. No. I didn't say that.
Mr. Manzullo. What exactly do you want this town to do for
you? What is it that you want or don't want?
Mr. Pardo. What we want is some minimum regulation from the
Federal Government, minimum regulation from the Federal
Government that standardizes the regulations between the
States. Because these so-called nuances are--it is easy to say
``nuance.''
Mr. Manzullo. What you want is preemption then?
Mr. Pardo. No.
Mr. Manzullo. Nuance is called federalism. States have a
right to pass their own laws with regard to the jurisdiction
that exists there.
Mr. Pardo. In the case of insurance, but this isn't the
business of insurance.
Mr. Manzullo. Are you saying this is a gray area?
Mr. Pardo. I don't think it is gray.
Mr. Manzullo. I am just trying to figure out, you know,
what it is that you want from us because you never ask
Washington for something and then be surprised at the product.
Mr. Pardo. I think I told you what we wanted. But maybe I
didn't make myself clear.
Mr. Manzullo. Could you take a minute or so and tell me
what that minimum regulation is that you want?
Mr. Green. [presiding] The Chair will allow the gentleman
to answer, and the time has expired afterwards.
Mr. Pardo. I am not prepared to sit here and go through the
entirety of it, but I will be happy to have one of my attorneys
here behind me--
Mr. Manzullo. No. Just an idea of what it is you want.
Mr. Pardo. We would like to see--Life Partners, a 19-year
participant in this industry, would like to see a
standardization between the States of a minimum set of
regulations such that instead of having to have two compliance
lawyers and a staff looking at every single State and the
differences between every single State, we can be dealing with
standardized regulation.
For instance, one thing would be reciprocity. We are
licensed in the State of Texas. If we are licensed in the State
of Texas and we are complying with Texas law--which I will say,
for the most part adopts the NAIC model, but not entirely, and
we comply with it and we are in good standing, then why should
we have to go through the same regulatory process as a buyer
now?
Remember, we are not selling anything. Why should we have
to go through that same process in Florida or New York or Iowa
or any other State? Why can't there be reciprocity or some
other mechanism that could be put into place that would allow--
Mr. Green. We will ask that additional questions be placed
in writing. Mr. Pardo can respond in writing.
We will now recognize Mr. Grayson from Florida for 5
minutes.
Mr. Grayson. Thank you, Mr. Chairman.
Looking down the table here, I want to know, are any of you
looking for a bailout?
Come on, be honest. Nobody? Well, that is refreshing, I
must say.
I just want to know because a lot of hearings that we have
been having lately are focused on the question of taxpayer
money going to private industry. I don't think that question
has been raised today.
Harm to the financial system, I don't see that question
being raised today either.
So I want to make sure, are any of you too-big-to-fail? I
don't mean you personally. I mean your organizations. Are any
of your organizations too-big-to-fail?
No? Good. I am glad to hear that.
Are any of you going to cause the destruction of the world
financial system? Come on. Be honest. If you are going to cause
the destruction of the world financial system, I want to know
about it. Anybody? This is your last chance.
No? None of you?
Are any of you actually regulated already by any of the
laws that we have passed on this committee?
No?
Oh, hey. We have somebody here. Okay, I am starting to see
why we might be here today. But I think that, as I understand
it, a big part of the reason we are here today is because of an
article in the New York Times.
So let me hear from Mr. Dorsett, your view of that article,
since that is why we are all here.
Mr. Dorsett. I would have to say we found that article to
be rather poorly researched and quite misleading in its
implications. We were told by the reporter that they did
extensive research in the area, including trolling the LISA Web
site, but somehow they couldn't find a phone number for Doug or
myself to actually talk with anyone in the industry.
I don't want to slam the New York Times, and certainly I
will have to say we got a lot of calls because of that, both
our individual members and LISA, by people saying, I didn't
know you could sell a policy; how do I go about that? So it
wasn't all bad.
Mr. Grayson. Tell me exactly what it was you thought was
wrong about the article. You said it was misleading.
Mr. Dorsett. The numbers were vastly inflated, as you have
heard from a number of testimonies today, as far as how big the
industry is and what is going on. The implication that there
was some relationship between the potential securitization of
life settlement, which actually has not happened, and the
subprime market was somewhere completely out of left field.
So, as we said, we didn't see a whole lot of accuracy to
the article. But it did point attention to the industry, and I
suppose that is a good thing.
Mr. Grayson. What were the scary things that the article
mentioned that you feel aren't valid?
Mr. Dorsett. The primary one was that life securitization
was a train out of control, that the numbers were large, that
it was not a regulated industry, and that somehow this was out
of control and a train heading our way, which I think the
testimony would indicate is not the case from pretty much
anyone here.
Mr. Grayson. What percentage of life insurance policies
have been secured this way?
Mr. Dorsett. There have been, to my knowledge, two private
securitizations. One of them, the Coventry securitization; the
AIG book was relatively large and involved 3,400 policies, and
it was like $8 billion worth of life settlement. That, however,
was a transaction done purely internally within AIG to move
money from one place to another.
Outside of that, legacy benefits today are a fairly small
securitization. There are certainly a number of people who
would like to securitize life insurance settlements and a lot
of transactions are being looked at. But there are a number of
hurdles to doing that, not the least of which is getting
through the rating methodology.
I have seen a lot of deals pitched here recently where, by
the time you go through the process of creating the pool,
adding capital support, future premium payments,
overcapitalizing, the sorts of yields they were talking about
weren't going to get anybody too terribly excited.
Whether it is going to work in the market is an open
question.
Mr. Grayson. I do believe, Mr. Chairman, that we should not
close the barn door after the horses have escaped from the
barn. But here I see a situation where there is no barn, there
is no barn door, and there are no horses, as far as I can see.
But just to be absolutely clear about that. I don't want
you coming back 6 months from now and saying you want a
bailout. Are we clear about this? You are not asking for any
Federal money, correct?
All right.
And you are not asking us to regulate something that is not
regulated now by the Federal Government, are you?
Mr. Dorsett. We are not.
Mr. Grayson. Thank you very much, Mr. Chairman. I yield my
time.
Mr. Green. I thank all of the persons who are here
testifying today, and I do so on behalf of our chairman who had
to step away.
Before we adjourn, we will have to make a part of the
record the statement of Mr. Joseph M. Belth on life
settlements. Without objection, it is so ordered.
And the record will remain open so that persons who desire
to submit additional questions may do so. The record will
remain open for 30 days, such that we may receive the questions
and responses.
This panel is dismissed, and the hearing is adjourned.
[Whereupon, at 4:20 p.m., the hearing was adjourned.]
A P P E N D I X
September 24, 2009
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