The Deals That Made the World by Jacques Peretti

Author:Jacques Peretti
Language: eng
Format: epub
Publisher: HarperCollins
Published: 2018-03-27T04:00:00+00:00

A Surprising Inspiration for Subprime

In 2007, the Jenga pyramid of subprime mortgage bundles built on Black-Scholes risk taking was pushed to the edge. But years before this financial cataclysm unfolded, Wall Street had already been given a tantalizing glimpse of what could be achieved by bundling risky loans.

In 1982, as Robert Dall’s securitization revolution was coursing through Wall Street, a health insurer down on his luck was sitting on his porch in Florida reading his local paper. Tucked inside was a story that piqued Peter Lombardi’s interest—about gay men dying of a mysterious disease in San Francisco.

Lombardi ran a small Florida-based health insurance company called MBC, which, in 1982, was struggling. But when he read this story, he had an idea. Lombardi had discovered that gay men dying of AIDS could not access the money in their life insurance policies when they needed it: while they were still alive. This was money that could buy them better health care, pay off a mortgage for a partner, or fund a nice vacation. Money that could massively improve the remainder of their lives. So Lombardi offered them a deal: upfront loans on their life insurance policies in exchange for the full payouts upon their deaths. Lombardi came up with a name for his weird new loan: a “viatical.” He had created the death futures market.4

The only reason Lombardi could loan all this money in the first place was because he himself had borrowed it at extortionately high interest rates. It was a rather unsavory idea, but undoubtedly clever. The insurance policies of a few men dying of AIDS amounted to little in themselves, but when thousands were bundled together into a viatical, suddenly the sum might be hundreds of millions of dollars, money that could then be used as leverage to make far bigger loans and deals. The viatical was about to make Lombardi a major player on Wall Street.

But viaticals depended on one crucial element to work: the men passing away quickly. The quicker they died, the quicker Lombardi could collect and pay back whomever he had borrowed from. It was a shell game of debt, just as subprime would be. Lombardi’s viatical pyramid was colossally risky, but Lombardi believed he could handle it.

In 1985, the first viable AIDS drug was discovered. Clinical trials on an HIV inhibitor called AZT began at Duke University, led by a Burroughs Wellcome virologist, Marty St. Clair. To the rest of the world, from the millions of HIV-positive people in sub-Saharan Africa to the men in San Francisco and their families, it was a miracle. But to Peter Lombardi and his business partners at MBC, brothers Joel and Steven Steinger, it was a disaster.

The money started slowing down and Lombardi became frantic. MBC was no longer collecting life insurance policies fast enough to pay its creditors. It had forked out over $100 million to more than 28,000 people with terminal AIDS. Now, with AZT destroying their business model, the partners doubled down on their original strategy, seeking out people who were ill with other diseases, such as leukemia or cancer.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.