Wednesday, August 29, 2012

Explaining the Annuity Gimmick

 [Meta note: this post would have been up a while ago were it not for AT&T's "improved" DSL service.]

I must have my bluetooth on stun.  Tonight I caught the podcast of lat week's This American Life (cf. link) where they talked about the guy in Rhode Island who bought annuities on the dying and now finds himself facing a 66-count indictment.  It's a great piece but I didn't hear anybody clarify what seems to me to be the underlying issue here--rather two different issues.   

One, the policy.  Here's an annuity with a cherry on top: a guaranteed payout at death.  The core business makes sense.  The company is playing the spread.  They plan to make money on the difference between what they collect investing and what they have to pay on the annuity.   The guy who buys the package has to accept a low rate of return.  But otherwise it's heads I win, tails you lose.

Apparently the trouble is that somebody forgot about the prospect that the customer might die too soon.  That would mean you don't have enough time to collect on the spread, and you still have to make the final payout.    That is, nobody thought to write in a clause saying  you had to prove you were in good health at the time of purchase, or that you had live for a year, maybe two, maybe three, before you'd earned the right  to the final payoff.  So  far, this is just bad underwriting, or bad lawyering, or both (surprise: they've changed the terms of the contract).

This is where our hero steps in.  He figures that if he can get policies on the aged and the infirm, he can make a bundle gambling with the insurance company's money.   So he signs up a bunch of wrinklies and crumblies.  He gives them some cash, maybe a couple of thou, all they have to do is sign.  To listen to the podcast, you'd have to infer that the customers (or their survivors) were delighted with the deal: for them, it looked like free money.

Well.  Delighted, at least until the prosecutor came round and drummed it into much more money the seller had made.  Now is the time when they (or at least some--not all) are ready to turn state's evidence.

It seems to me that this is issue #2, conceptually unrelated to the bad-underwriting problem above.  Evidently the defendant thinks he can show that he never misled anybody, that he never concealed anything, that he promised them money for the signature, and that he kept his promise.

I'll bet  know where you are going with this one.  The little Ron-Paul homunculus on my left shoulder keeps yapping "Hey, they're grownups! If they didn't want the money they shouldn't have taken it. A deal's a deal, let it stand! "  Boy, I'm tempted by that one.  But the bleeding-heart homunculus on my other shoulder keeps answering "Yeh, and pigs will fly.  These people didn't understand what they are doing, and would not have understood it if you'd spelled it out in flashing neon lights.   It takes a special kind of mind to spot a gimmick like that, and decent people don't do it.   Taking contracts from these poor souls was like buying Manhattan island for $24 worth of beads."  

Oh meo myo, a dilemma.  But the voice on my third shoulder (?) adds: "Right, not a single Wall Street pirate has spent so much as one day behind bars. And we are going after a guy who kept his promise.  The only reason for a prosecution here is that the prosecutor can't figure it out either,  and therefore figures that somebody ought to go to jail."  

I am not cool with that.

Afterthought:  That part about the beads--did that ever really happen?

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