December 18, 2009 / 7:29 PM / 10 years ago

Goldman retreats from life settlements

*Goldman Sachs winding down life settlement index

*Goldman decision follows Congressional hearing

*Credit crunch crushes exotic securities

By Matthew Goldstein

NEW YORK, Dec 18 (Reuters) - Goldman Sachs (GS.N) is quietly backing away from life settlements—- the business of buying life insurance policies from aging Americans in the hopes of collecting on the death benefit.

The Wall Street investment bank is ending its involvement with a “mortality index” it launched in December 2007 with high expectations. A Goldman spokesman confirmed the decision.

Goldman’s QXX index tracks the life expectancy of a group of people aged 65 and older who have sold their life insurance policies to an investment pool that’s managed by another firm, AVS Underwriting LLC.

The Wall Street company once had big plans to sell derivatives pegged to the index to investors seeking exposure to the estimated $15 billion life settlements market. Goldman also saw the derivatives as a potential hedge for any institutional investor buying a security or note backed by another pool of life settlements.

But the market for Goldman’s index-based life settlement derivatives appears to be a casualty of the worst financial crisis since the Great Depression, said executives with several life settlements firms, who didn’t want to be identified.

Goldman and other Wall Street investment banks began moving into life settlements in 2006. The banks viewed the market as a potential profit center, given the advancing age of the baby boomer population and the need for some of them to supplement their retirement incomes.

Since then, the market for exotic securities of all stripes has withered and Wall Street is struggling to revive interest in even the most mundane type of securitized products — bonds backed by a pool of loans, mortgages or credit card debt.

The market for bonds backed by life settlements — so-called “death bonds” — has been even slower to pick up.

Goldman spokesman Michael DuVally confirmed that Goldman recently decided to end its involvement with the life settlements index. “It never really did much of a commercial business,” he said.

But executives in the life settlements business said Goldman may also be throwing in the towel on its fledgling index because the firm is wary of the “headline risk” associated with these speculative investments. The executives did not want to be identified because some of them do business with Goldman.

Critics argue that life settlements are nothing more than an opportunity for a speculator to make a wager that a policy seller will die sooner rather than later. Investors profit by buying policies at a fraction of their face value and collecting on the death benefit when the person who sells the policy dies.

In September, the House Financial Services Committee held a hearing on Wall Street’s involvement in the life settlement market and asked Goldman Chief Executive Lloyd Blankfein or one of his “designees” to testify. The firm sent Steven Strongin, a managing director, to testify. He told the panel that life settlements represented a “very small percentage of our overall business.”

Strongin also testified the company had never been involved in a life settlement securitization and had “no plans to execute one.”

DuVally declined to comment on the future of the firm’s two other life settlements businesses, Longmore Capital and Longmore Credit. “We don’t comment on our business strategies,” he said.

The Longmore subsidiaries are in the business of acquiring life settlements or providing financing for those transactions. Goldman formed the businesses some three years ago after deciding against buying an existing San Diego-based firm called Life Settlement Solutions. (Reported by Matthew Goldstein; Editing by Jeffrey Cane and Steve Orlofsky)

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