Death Benefit

9.

406 PARK AVENUE NEW YORK CITY MARCH 2, 2011, 10:37 A.M.

Edmund and Russell entered the midsize high-rise along Park Avenue in midtown Manhattan. Predictably, Edmund had been in a sour mood on the Town Car ride down from Greenwich. Russell had insisted on sharing the ride-he wanted to see if he could soften his partner’s mood before they met Gloria Croft. Edmund had been a bully all his life, and he felt uncomfortable in any situation where he wasn’t in charge. Not only was he not controlling events here, it seemed like he was being played, and by a woman, and by a woman who used to work for him. Russell doubted whether his calming words had had any effect.

When they arrived, Gloria used a script she had learned from Edmund, and Edmund knew it. The two men were buzzed into the suite and shown into a glass-walled conference room, where they were left to stew for fifteen minutes. The receptionist was very polite, and they were offered coffee or water. Outside the room, the office seemed calm and peaceful, with only the hum of the air-conditioning system breaking the silence. The image exuded was of quiet authority.

Then Gloria emerged. She’d changed her look since Edmund had last seen her. There was now a slight wave to her mid-length, lustrous brown hair. She wore a well-tailored business suit with a lavender blouse and black heels. There was just the right hint of decolletage. She looked like ten million dollars.

“Gentlemen, I’m very sorry, something going on in Singapore.” Russell and Edmund had stood up when Gloria entered, and she walked over to each man and shook his hand. There was a slight, almost imperceptible smile on her face. She was clearly enjoying herself.

“Follow me!” She walked out of the conference room quickly, and Edmund and Russell gathered up their coats and briefcases and hustled after her.

“She’s got us trotting along like a couple of poodles,” Edmund muttered under his breath.

Gloria was already sitting at her desk when the men entered her office. Some giant, abstract, and presumably very expensive painting hung on the wall behind her. The desk itself was bare save for several large telephones; carrels behind Gloria were strewn with prospectuses and various files. One entire mahogany wall was inset with the mandatory array of televisions carrying the financial channels. Gloria pressed a button on the underside of her desk, and the office door soundlessly closed. When she spoke, she sounded coy even if Edmund knew that was something she was incapable of.

“I feel like I’m twenty-five again. Back then I was like a suckerfish hanging around the great predators, looking for the little scraps of food they missed when they fed. The ocean was full of blood. It was a lot more fun then than it is now, don’t you agree?”

Edmund didn’t like the way this had started out. Even he wouldn’t have been this bold. Now she was the shark, and they were the suckerfish, and it was their blood she smelled in the water. He bit his tongue until Gloria started talking about the “opportunities” she had lucked into in the subprime field, opportunities she was grateful that the market (meaning Edmund and Russell) had made available to her.

“Well, Gloria,” Edmund said, trying to control himself, “you’re just not as smart as you think you are. That subprime stuff was never designed to succeed. We knew it was going to fail. We were shorting each other. We were shorting ourselves.”

“Maybe you were, but not till the very end. I was buying swaps five years before you”-Edmund snorted-“and you guys were still leveraging your position selling the worthless bonds right up until Lehman went down. Tell me you weren’t.”

Gloria had at least one of her gloves off now. She felt she held a winning hand against LifeDeals. It might make for a longer game if she held her cards, but she had Edmund and Russell right where she wanted them, and she could enjoy witnessing their reaction if she played her hand now. She’d probably make just as much money in the long run if LifeDeals wasn’t a public company. It depended on how far Edmund was going to push his luck. That morning before they arrived she’d looked at herself in the bathroom mirror and said, “Payback time.”

Gloria cleared her throat and went on: “The traders who sold those CDOs should have gone to jail. The whole of Wall Street was tarred with that brush. Immoral, greedy, selfish . . . it was stealing.”

“Nonsense,” Edmund said. “You said it yourself: it was an opportunity . You destroyed those companies. Your fingerprints are on the bodies. The government mandated that mortgage lenders make subprime deals. Everybody should have a home. No one held a gun to anyone’s head…. I don’t understand why we’re raking over all this again. We’ve moved on. You clearly haven’t, but I’d urge you in the strongest possible terms to get over it.”

Edmund was exerting as much self-control as he could, speaking slowly and evenly. Russell knew the plug on the volcano was shaking, the whole thing was threatening to blow. Robotically Edmund continued.

“We have the utmost confidence that LifeDeals is a winner and is going to prove to be so in the very near future.”

“Oh really,” Gloria said. “Well, I have half a million in credit default swaps on the line that says it won’t. And I’m going to buy more. And you know what, I’ll be glad when it fails, because I think you’re stealing again, only this time you’re stealing vulnerable people’s life insurance, and you’re paying them pennies. These are old people who are desperate for money because they need an operation and don’t want to go bankrupt because our health system has written them off.”

Edmund was massaging his temples. They were bankers, they made money, end of story.

“The Supreme Court has ruled that life insurance policies are equity that people can buy and sell,” Edmund said.

“You’re paying fifteen percent of face value. Ten if you can.”

“We are offering a legitimate financial service to older Americans who need cash for whatever reason. We haven’t created the need, we’re merely filling it. It’s of no concern to me whether an individual is paying for a new hip or a cruise to Alaska. Perhaps they just don’t want their ungrateful children to get the money. There’s nothing immoral or unethical about it. We’re helping put money back into the economy. You should thank us.”

“Oh, spare me, Edmund. Now that the mortgage market has dried up, some clever analyst zeroed in on life insurance. It’s another gold mine and damn the consequences for the people involved.”

Russell could see this was going nowhere fast. He moved forward in his seat. “Gloria, with all due respect, Edmund and I didn’t drive down here to debate the ethics of life settlements, although I have to say they have been around for years with little protest. We’ll have to agree to disagree. We’d like to know why you’re so sure we’re wrong. I brought along some research as backup.”

Russell placed financial statements in front of Gloria along with complicated graphs that showed bell curves for the life expectancy of people whose policies LifeDeals had purchased, separating them by the diseases the holders suffered. He gave Gloria the whole picture, letting her see her more information than was normally presented to prospective hedge fund managers. He then described the plan, how they would securitize the policies into bonds, resulting in vastly increased income that was then used to buy up more policies to make into more bonds. The bonds were weighted, the largest segment based on diabetes, the second largest on cardiovascular disease, and the third on kidney disease. While Russell talked, Gloria glanced at the financial statements and the bell curves. It didn’t take her long. When she was finished, she tossed them aside as if she didn’t believe any of it.

Finally Russell explained that since the bell curves could accurately predict when the policies would pay out, they could factor in all the other cogent data and determine their cash flow extremely accurately and buy as many policies as the revenue streams allowed. Their actuarial data was enormous, going back fifty years, and even longer if they needed it.

“We’ve left nothing to chance,” Russell said. “It’s foolproof, based on real numbers. Sure, a few people are going to have spontaneous remissions, but others will pay out faster than predicted. It’s all based on accepted mathematics and the bedrock is the insurance companies. It might be the best investment opportunity ever, backed by the Supreme Court ruling, so there’s no chance the insurance industry can lobby Congress to have laws and rules changed. The insurance companies are going to pay every penny the policies have accrued.”

Russell suddenly stopped, out of breath. Russell and Edmund looked at Gloria, who stared back for a couple of beats. There was silence.

“Don’t you see it?” Russell questioned.

“I see it,” Gloria said. “You’re the ones who don’t see it.”

“It’s real. We’ve run the numbers up and down and confirmed it with all the actuarial companies. It’s real. We’re already holding fifty thousand policies-”

Gloria whistled. “How much are the premiums on fifty thousand policies, Russell? You must be paying out about four, five million a month. You’re going to run out of capital by the end of next year if you don’t start having significant income.”

Russell and Edmund knew she was right. That Gloria was smart was not news to Edmund; he wouldn’t have hired her otherwise way back when. But in this instance they’d be fine, they were going to be fully capitalized by the end of this year. He wondered if Gloria might be bluffing and was beginning to think she was. So far she’d given them nothing. He was getting tired of this.

“Gloria. All you’ve told us is that we are mean, heartless bastards taking money from old ladies,” Edmund said. “But we knew that already. I think you’re fishing. You told some guy you were shorting us knowing it would flush us out, and we’d come down here and explain our business plan. Which we have done. Congratulations. Now we should go and not take up any more of your time. We’ll be more than happy to mail you a prospectus in due course.”

Edmund’s irritated expression had morphed into the insufferably smug look Gloria remembered from whenever he had dressed her down in days of yore. She pulled out the central drawer of her desk and found a red Sharpie on her desk. Looking at Edmund, she took one of Russell’s graphs and copied the bell curve, only drawing it shifted to the right of the one printed on the paper. She held up the graph.

“What would it mean to you if this happened?”

Russell squinted at the paper-it was the diabetes chart.

“That’s not going to happen.”

“Humor me. Hypothetically.”

“You’re projecting chronically sick diabetes patients living about ten years longer than they’re going to live. As I said, it’s not going to happen.”

“Let’s say forty percent of your policies are diabetes patients. If we have a curve like mine instead of the curve like yours, I reckon that’s twenty thousand policies you’re stuck with for ten additional years. That’s, um, two hundred and forty million in premiums you weren’t expecting to pay. Kind of cuts into your model, doesn’t it? Perhaps they’re half your policies. I think the curve needs to move a little more. Fifteen years and it’s four hundred and fifty million. Your biggest source of revenue becomes a sinkhole of toxic assets.”

“That’s hypothetical, and it flies in the face of fifty years of actuarial data. Fifty years!”

Edmund was yelling but Gloria was looking at Russell. He looked worried.

“Yes, you have fifty years’ worth of old data. But you’re not looking at the future. Technology can make a monkey out of a table in a minute. If you have any more great ideas, please share them with me, I will be happy to take a position on them too.”

“What the fuck are you talking about?” Edmund demanded.

“Do you know what an iPS cell is?”

“I’ve heard of them, yes,” said Edmund. “Something to do with stem cells. But I don’t see-”

“Induced pluripotent stem cells,” said Gloria. “If you looked to the future and not to the past, you might know that iPS cells are going to have a huge impact on regenerative medicine.”

“You mean stem cell therapy?” said Edmund. “That bubble burst ten years ago, all those biotechnology start-ups? Penny stocks today.”

“Edmund, you’re still talking about the past.” Gloria had come this far. “You’re ignoring the future.”

“Okay, Gloria, what do you see in your crystal ball?”

“Have you heard of the Nobel laureate Tobias Rothman? Or Junichi Yamamoto? What they’re doing at their research lab up at Columbia Medical Center?”

“No,” Russell said, feeling that the ceiling was pressing in on him.

“Through a contact who follows biotech patents I’ve learned that Rothman has mouse organs, entire organs, that he has grown from iPS cells that he’s transplanted back into the same mice that donated the cells. Any day now he’s going to do it with human iPS cells if he hasn’t already. He’ll be able to grow pancreases. For humans. To make insulin. Pancreases that are custom made for a patient so no rejection. You know what that’s going to do?” Gloria pointed to the graph she had drawn over and dragged her finger from Russell’s bell curve to her red version.

“That.”

Gloria sat back.

Russell had done the real math in his head. Thanks to some particularly aggressive salesmen in Texas and Florida, they were extremely long on diabetics’ policies. Gloria had in fact undershot-they were almost two-thirds of their policies. Meaning they might be on the hook for almost $600 million in additional premiums. Who knew if the science was going to work and when, and not every patient was going to be helped, but still, if she was right, their paradigm would be in tatters. Was there any way they could dump those policies? Could they securitize them anyway? Would anyone invest in the company with this much doubt about the nature of the risk? These questions were occurring to Russell; Edmund just wanted to get the hell out of there.

“Think of LifeDeals as a swimming pool,” said Gloria. “There’s water pouring out already and there’s going to be a lot less of it pouring in than you planned in the near term. You guys are going to be left high and dry with no life preserver.”

Gloria was enjoying herself.

“You want some advice? I doubt it but I’m going to give it to you anyway. Hurry up and securitize and sell those tranches ASAP, before others start to see that the ground under LifeDeals is going to be more like quicksand than bedrock. Once that happens, your bonds are going to go begging. Some of the money that comes in from the bonds you might be able to squirrel away if you’re clever, and I know you are, but you certainly aren’t going to get back your seed money. Unless you want to break the law. Which brings us neatly full circle. Perhaps you’ll end up going to jail this time.”

“Russell, we gotta go,” Edmund said, as Russell gathered up his papers. Edmund and Gloria held each other’s glare. Gloria had played her hand, and she could see it had hit home.

“So sorry you guys have to run, but I have to go to lunch anyway,” she said.

Gloria handed Russell some more of his papers. She’d already decided to strengthen her position against LifeDeals significantly later that day. Edmund was right in part-she had wanted them to tell her about their business plan, and she assumed Edmund would be arrogant enough to tell her too much. Now she’d seen their model, and it was even worse than she could have hoped. Or better. Maybe she’d cost herself some money, but she already had more than she could reasonably spend in three lifetimes.

That look on Edmund’s face was priceless.

Edmund and Russell were silent as they waited for the elevator. Russell stole a look at Edmund’s face, and it bore an expression he had never seen. It looked like grief. They got in the elevator.

“Hold these a second,” Edmund said to Russell, handing him his case and his coat. Edmund stepped forward and slammed the elevator door hard with the fist he’d made of his left hand. He cried out and grabbed his hand. The pain, when it came, was a relief.