Wednesday, May 03, 2006

Killed By Death

I was amused to see in this weekend's Indy that a British financial advisor has got himself into trouble by selling his clients securities issued by a US firm specialising in death futures, properly called viatical investments. His situation doesn't look good, as he seems to have told his clients that 20 per cent of their cash was going in that firm when in reality he'd bet the farm, 100 per cent, on it. Now it's gone bust, his clients have lost thousands, and he's being sued.

The problem was both superficial, and fundamental. Superficially, the firm he invested in should have been treated with extreme caution, as it was involved in a variety of regulatory investigations and its founder and CEO was a convicted fraudster. Whether his motives were entirely honest must be questioned. Fundamentally, though, the underlying investments have a serious problem.

In the late 80s/early 90s, the wave of Americans being diagnosed with HIV/AIDS led to a new phenomenon in finance. This was a sizable group of people, often with considerable assets, who knew with as good as total certainty that they would die before being able to realise on life insurance. The viatical market emerged as a result. Essentially, the AIDS patient would sell their life insurance in exchange for an annuity. On their death, the buyer would collect the payout. Both sides should have been, if probably not happy, then at least satisfied with their financial arrangements.

This may seem ghoulish, but (as I seem to recall someone saying in a discussion at Crooked Timber) it did prevent a large number of AIDS sufferers ending up on the streets.

The next trick was to securitise the expected stream of policy payouts. As in any other securitisation, tradable contracts giving the bearer the right to some fraction of the money were sold to private investors. These are the famous death futures. The issuing party would then be able to invest the proceeds in something that would generate an income to pay the annuities. Clever, huh? Only one thing could go wrong...what would happen if the people unaccountably failed to die? The investors essentially hold a short position in their survival, an unhedged one to boot.

In 1996, the protease inhibitor drugs were discovered, and quite suddenly (oddly enough, the same year death futures became tax-deductible) the people stopped dying. With the antiretrovirals keeping the virus in check, their life-expectancy went up, their health improved, and quite a lot of them went back to work. But the viaticals business is committed to pay an annuity for life. Oh dear!

That's interesting enough. What struck me about the story was that there's a cracking movie in this, and the locale only makes it more so. The British angle played out, you see, among rich British expatriates around Marbella, which is practically a codeword for "gangster". We have the patsy, the nerdish IFA who put Vicious Vince's ill-gotten gains in death futures. Now, he's facing a pair of concrete boots. The obvious answer is to make good and sure those investments get on with it and kick the bucket.

Of course, the authorities (perhaps represented by a comically thick British plod sent to seek Vince's extradition) get it wrong and suspect Vince. Only the Spanish female detective sees through it, but her involvement with the killer, liberated from nerd-dom by transgression, gets in the way.

I've already got a working title...

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