Mind the Gap

Take one camel and one needle
Greed may be good, if you're lucky


Okay, I'll take the call, Mary.

Hello Charlie, how are you? Great to hear from you…

Yes, Charlie, I know there's been a bit of bad luck… Well, maybe not only luck, but luck is always involved in investments. That's why you've got to be in it for the long haul, so that the good luck and bad luck cancel out… How long a haul on those particular bonds? I really don't know, Charlie. It depends on a lot of factors…

I really don't think it's fair to put all the blame on me… Well of course I advised you; that's what a financial adviser is for… Yes, with the benefit of hindsight, clearly mortgage-backed securities were not the soundest advice. But I wasn't the only one; everyone thought they were a sure thing. Some of the world's biggest and solidest banks endorsed them…

Lehman Brothers? I specifically recommended Lehman Brothers, did I? You sure I didn't say "a bank like Lehman Brothers?"… Okay, okay, maybe there's not a big difference. But you know, Lehman Brothers really wasn't worse than anyone else. It was just a political decision in Washington; who was saved and who was allowed to crash. You can't predict those things…

Charlie, I think "hare-brained scheme" is much too strong. That's an exaggeration. Mortgage-backed securities did not consist only of subprime mortgages; they were only ever a small part… Yes, a bigger part in some securities than in others. That's why I recommended only mortgage-backed securities with a triple-A rating… Yes, I agree: a number of ratings agencies were certainly not as careful as we have a right to expect.

But mortgage-backed securities themselves were quite a clever idea, if handled properly. They included mortgages from all over the country, which is why they seemed so safe. House values might drop in one region for a while, but what would be the odds on them dropping nearly everywhere at the same time?…

Yes, I know that's what did happen. But the first time ever! That's why I say it involved a lot of bad luck…

What now? That's the attitude! We should be looking ahead, not backward. There are some interesting new derivatives being developed, and I'd think you'd want to get in on them before they take off. Do you know about this thing the industry calls a "life settlement?"... That's right. It's when someone has a life insurance policy and they feel they don't need it any more, because their kids have grown up or whatever. So they sell the policy for a fraction of its face value. The buyer keeps paying the premiums, and in a few years, when nature takes its course, the buyer collects the full value of the policy…

No, Charlie, I'm not offering to buy your life insurance; I know you're determined to see that Agnes is looked after. What I'm saying is that there are banks creating some solid new securities by consolidating several hundred life settlements into a single bond. We can buy these bonds, and then, when the policies mature, that produces our income stream…

Yes, the other cost is that whoever buys the bonds has to keep paying the premiums on the insurance policy... No, I know it sounds a bit like the mortgage-backed securities, but it's not really the same. That depended on luck, at least in the short term, as we know. This is a cinch by comparison, really no risk: Charlie, everybody dies. How could anyone lose?…

Sure, sure, they won't all die quickly, but that's why the policies are bundled together, to produce a good average income stream. And anyway, it's mostly old people who sell their policies…

Charlie, I respect your decision; I would never question anyone's decision made on moral grounds. I don't completely agree, but I understand what you mean: you don't want to feel like you're waiting for someone to die so you can go to Europe. I felt something similar when Dad was sick and, you know, I was more and more running the business. I understand.

But there are other derivatives being developed–probably more than I've heard about. Securitised life settlements are only the beginning. There's another one I've heard about, but don't say anything because it's not public yet. Promise?... Okay, it's securitised disasters. Yes, that's right: if there's a tsunami, or an earthquake, or a volcano somewhere, that's very sad, but it's also an opportunity, because people are going to make money repairing the damage…

You're right, it's still too vague. In fact, securitised disaster bonds aren't on the market yet. But keep your eye open for them when they launch. And the other thing, Charlie, absolutely guaranteed: bank executives' salary futures. Go long.

Allen Myers