Death Benefit

6.

GREENWICH, CONNECTICUT MARCH 1, 2011, 3:30 P.M.

Edmund Mathews went to answer the front door of his waterfront mansion in an extra-exclusive enclave of the already-exclusive Connecticut town of Greenwich. It was unusual that he was alone in the house, but his wife, Alice, had gone to the city with a girlfriend on a shopping expedition, and the au pair, Ellen, wasn’t back from school with Darius yet. There was no gardener on the grounds, no workman in the house, nor were there any painters, decorators, deliverymen, mechanics, cooks, or anyone else anywhere on the property. The $10 million house was quiet and unattended, just the way Edmund liked it.

This will be Russell, Edmund thought. Edmund and his partner, Russell Lefevre, had decided to take this Tuesday off because their work was about to get crazy. This was going to be the last free day they would have in months, and it seemed like now he was losing some of his free afternoon. Russell had called a few minutes earlier, sounding upset, and said he wanted to come over immediately to talk about something important. Russell had a habit of insisting on talking about anything sensitive in person. Back at Morgan Stanley, when they worked together in asset-backed securities, their calls had been recorded in case either party misremembered the terms of a trade later on. Edmund doubted very much that anyone was listening in nowadays but the old habit lingered with Russell. He was a worrier and he always had been.

Edmund opened the door and greeted Russell. His partner was a tall, lithe man with a sweep of blond hair tinged with gray. He was wearing tennis whites with a sweater thrown over his shoulders. For a man who was usually quite a dandy, he looked thoroughly bedraggled. When he wasn’t in a suit, Edmund preferred to wear old T-shirts and shorts, even in winter. He was thicker in the body than Russell, but not overweight, and he kept his hair short and neat with weekly trips to the barber in town.

Edmund could see that Russell had haphazardly parked his Aston Martin DB9 in the driveway and not over by any of the garages as Edmund preferred. The Aston Martin was a fine piece of automotive engineering but it was too ostentatious a machine for everyday use for Edmund’s taste. The garish crimson paint job only exacerbated the feeling. Edmund preferred the in-your-face statement he made in his black Escalade, but for driving enjoyment, he loved nothing better than taking his Morgan runabout on the back roads deep into Connecticut. His true pride and joy he drove only rarely: in his garage was a Ferrari 250 GTO that had cost him millions back in the days when that didn’t seem like such an extravagance.

“We’ve got a problem,” Russell said as he entered the atrium.

“So I gather. Let’s go into the kitchen,” said Edmund, who preferred to keep business discussions out of the house if he could help it. This was going to be one of those days he didn’t have any choice.

Russell and Edmund had both worked as derivative traders at Morgan Stanley. Edmund was one of the best traders there, agile and decisive and brilliantly able to find someone to take the other side of a position he was holding. He knew Russell had some limitations as a trader, but he had a quant’s mind that could calculate risk quickly, and Edmund could rely on him to tell him if something he was planning was feasible. Russell had seen the potential for making money in CDOs-collateralized debt obligations-exotic financial products that took advantage of the subprime mortgage market to create apparently risk-free investments that could make billions in profits for the company and tens of millions for the traders. With property prices on their seemingly unstoppable upward curve, the investments were safe as houses, as people in the know liked to say.

Eventually it turned out that many of the executives at the brokerages selling CDOs and at the financial institutions here and in Germany and Japan and elsewhere who bought them were completely ignorant of what a CDO actually was. They knew what asset-backed securities were, but the assets here were mortgage bonds packaged together and sliced up and sold in bundles. Many of the individual loans the bonds were backed by were subprime loans that would never be paid off, and only a few loans needed to fail before the whole package defaulted. It was inevitable that this would happen.

When Russell explained to Edmund precisely what the subprime loan crisis was going to mean to CDOs and other financial products and for the system as a whole, Edmund was unnerved and excited at the same time. He immediately, and secretly, used his own money to short his own firm and made bets on the failure of other companies exposed to CDOs. He continued to sell the doomed bonds even when disaster was inevitable. He made staggering amounts of money and after a while he told Russell, a loyal company man who’d never dreamed of acting that way, what he was doing. As Edmund predicted, Russell wanted in, and Edmund gave him some of his action.

As the banking catastrophe unfolded there were many victims: investors who’d lost their money, shareholders who found their stocks worthless, countless workers who lost their jobs. Men like Edmund Mathews and Russell Lefevre were not among them. Amid a clamor that the bankers involved should go to jail, they left the firm with close to $100 million in compensation between them.

Edmund had enjoyed his first weekend of unemployment to some extent, taking Darius to soccer practice without bringing his BlackBerry, having dinner with Alice and another couple in town, reading the Sunday paper. But by 9:05 A.M. on that first Monday, he was bored stiff. In his home office, he had two screens showing Bloomberg and MSNBC and he noodled around, making minor trades for a few tens of thousands of dollars through his online account. At ten, he called Russell and suggested they get back in the game on their own.

Okay, Russell, what’s the problem?” Edmund said, after handing Russell a glass of ice water. The men stood at either end of the island in the middle of the state-of-the-art kitchen. Edmund flipped Russell a place mat before he could put his water-beaded glass on the butcher block.

“I was playing tennis with Teddy Hill-”

“Teddy Hill? He’s got to be sixty-five. I hope you went easy on the old boy.”

“Ed, this is serious. I play with Teddy because he knows everyone, and he tells me things he hears. As he did today. When he told me, I practically ran off the court, left him standing there.”

“Told you what, Russell?”

“We’re being shorted big time.”

Russell was right. This was serious.

When he called Russell during his first Monday of alleged freedom, Edmund found that Russell was as anxious as he was to get something going. Unbeknownst to Edmund, Russell needed to be earning. In 2008, he found himself personally long on real estate, owning a portfolio of properties in Florida and California suddenly worth a lot less than their outstanding mortgages. When Russell had fixed his problem, he was low on cash and needed to leverage his severance money into something more substantial.

As they had done many times as part of a large corporate group, the two men took a weekend away to a hotel in Boca Raton to brainstorm. Before getting down to business, Russell insisted on going to the local mall to pick up some T-shirts for his four kids. Edmund waited for Russell outside the Gap and watched people passing by.

“Look at the people, Russell,” Edmund said when his partner returned. “What do you see?”

“Families, strollers, couples, lots of old people. What’s on your mind?”

“Right. Old people. It’s Florida, famous for oranges and old people. What do old people have?”

“I dunno, high car insurance premiums?” Russell said.

“That,” Edmund said, “but this generation also has lots and lots of life insurance.”

And Edmund told Russell his idea. It was called “Life Settlement.”

The partners figured they had stumbled upon something big. Russell crunched numbers for weeks while Edmund discreetly got advice from his old contacts: lawyers, traders, bankers, ratings experts, and hedge fund managers. The idea was legal, and it was doable. And Russell said the numbers were watertight.

“The only way this doesn’t work is if we have the Second Coming and Jesus stops people dying,” Russell said.

“And we know that’s not going to happen.”

In early 2010, LifeDeals, Inc., was formed with Russell as CEO and Edmund chairman of the board. The start-up money was most of their $100 million take from the subprime debacle, and they used it to buy up life insurance policies from thousands and thousands of Americans desperate for cash. Edmund hired the most aggressive salesmen he knew and told them to hire even more hungry people to go out and pound pavement and buy policies for no more than 15 cents on the dollar. There were millions of Americans who needed money for long-term care, or to finance an operation when they didn’t have medical coverage or, as was increasingly the case, even when they did, but the coverage wasn’t adequate or the insurance company figured out a way not to pay. LifeDeals had to pay the balance of the premiums, but when the policyholder passed on, as they would as surely as night follows day, the payout was theirs.

Within six months, the LifeDeals board was confident enough to take the company public. Edmund and Russell held options that made them very wealthy once again, but they wanted capitalization to buy more policies. Edmund’s favorite statistic was that there was more than $26 trillion in life insurance policies sloshing around out there for the taking. Their plan was to start securitizing the policies, aggregating them, and selling bonds. This time, the assets behind the securities were cast-iron, personally guaranteed by the grim reaper. And thousands of people every day were walking away from policies they had paid into for years because they couldn’t afford the premiums. They were waiting to be picked off.

Edmund liked to think his company could someday be worth a trillion dollars.

Who is it?” Edmund asked.

“Teddy doesn’t know. He heard it from a friend who heard it from a friend. But he trusts the party. Swears it’s true.”

“It’s just someone being a wiseass,” said Edmund.

“No,” said Russell. “It’s a biggish bet. Whoever it is, they’re sure we’re going down the toilet.”

“Well, we fucking well better find out who it is before we catch a cold.”

Russell knew the implications as well as Edmund. They needed a large institutional investor to underwrite their securitized package, and if it was known on the street that LifeDeals was getting shorted, that partner would be very hard to find. Everyone remembered what happened in 2008.

“We need to start going through the 13Fs right away,” Russell said, referencing the quarterly statements institutional investment managers had to file with the SEC outlining their holdings.

“And I need to start making some calls.”

Russell had left Wall Street with more intact relationships than had Edmund, and he could easily plug into the rumor mill. It was, after all, a very small community. Edmund didn’t need to say anything, both men knew what was at stake.