If you haven't heard of this contract, its really amazing. It allows the holder to buy a portfolio of stocks up until the Wednesday of the following week based on last weeks prices.
So essentially you can invest with perfect hindsight. The counter party, Aviva, didn't write the original contact but acquired the company that did. They haven't paid out any money yet and have contested the contract many times in court, loosing each time.
It's gotten worse for Aviva as their original plan was to delay paying out to bleed him dry to make him settle, but a few Swiss banks have lent him money to live off of and lent even more so he can leaver up his bet as he's allowed to invest additional funds into this contract.
The biggest issue is that you really can't value the contract as the holder is 25 and it pays out until his death. If he lives until he's 75 its worth more than the company could reasonably find.
If you are wondering why the insurance company would write such a contract, it was originally designed to be like a savings vehicle back in the 80s. It would let you swap between bonds and equities as your risk profile changed over the course of your life.
Back in the 80's it wasn't really considered feasible to sort through all the markets and figure out in time what to invest in to make this arbitrage. But with the internet, things changed....
> If you are wondering why the insurance company would write such a contract, it was originally designed to be like a savings vehicle back in the 80s.
I've heard this defense before, but it's not really very good. Even in the 80s this would have been a ridiculously stupid contract. Letting people invest with hindsight is fundamentally flawed, even if you think it would be "difficult" to get information then.
It's not like this contract depends on realtime changes. You could easily have exploited it just as well with a daily call to your broker.
> If he lives until he's 75 its worth more than the company could reasonably find.
I would say that he's got a pretty strong incentive to make sure Aviva doesn't go out of business. That alone will limit his ability to extract value out of this contract.
Is he the only one holding this contract? Can't all of the other holders also do the same thing, now that the tactic is public?
In that case, his stake seems like it would be (Aviva's value) / (number of arbitrage policy holder) as opposed to "100% of Aviva" as posited in the article.
It happens to me also, but also with Matt Levine. This guy is a great writer that knows a lot about what he writes, and that makes his pieces consistently enjoyable.
I expect that it's the long time horizon until Max-Hervé (or rather his estate) is actually paid off. Up until that point, barring any regulations which require the insurer to steadily accumulate reserves in response to the rising value of his policy, the insurer will keep operating - and profiting normally. It's entirely possible that this distant future cost isn't that much of an issue for most investors! And of course Aviva has 50 years to engage in legal wrangling as well. It would only take one amenable government in that period to turn the tables.
For Max-Hervé and his banks there is actually some rather significant risk. Their insurer could collapse due to some other cause, and policies might not be paid out. By keeping the policy and not settling, their taking out a position on Aviva's continued survival for 50 years.
If he is not paid out in the life insurance portion, it doesn't matter. If aviva collapses, he simply has a portfolio he can no longer rotate out of. So, his risk is really no different than risk of holding a portfolio of stocks in the worst case
One reasonable settlement would be to take 50% equity in the firm in exchange for his contract. Then he extracts half of all dividends for as long as he likes. Taking 100% probably would not be wise, as he'd be in charge of it and he probably has no idea how to run it.
That reminds me of the mythical king who agreed to pay "just" one grain of rice for the first square of a chessboard, two for the next, then four, then eight, etc. and ended up losing his entire kingdom.
Normally, continental European law protects consumers from their own stupidity. If a contract contains something in the fine print that is clearly against the intent behind the contract, it is invalid. Similarly, I would expect that there is a good chance to render this contract invalid as well, even tough firms do not enjoy the same level of protection from their own stupidity as consumers.
I don't think this is a case of the contract containing "something in the fine print that is clearly against the intent behind the contract" though. The underwriters may not have correctly calculated the exposure of the contract, but they knew what they were selling.
From the article:
> But Max-Hervé George didn't mess with any expectations. Aviva had to expect exactly this. This is nuts independent of actuarial assumptions. Aviva knew it was offering an arbitrage at its expense. The name of the thing is "Fixed Price Arbitrage Life Insurance Contract." That just means, "We have made a horrible mistake, would you like to buy it?" The answer is yes, all day long.
But apparently did not. The question is also: what did Max-Hervé expect? If he knew that the insurance could not have meant the contract the way they wrote it, it is morally (and maybe also legally) wrong to exploit their mistake (unless you live in Anglo-Saxon capitalism, where everyone is expected to screw everyone else given the opportunity).
> If he knew that the insurance could not have meant the contract the way they wrote it, it is morally (and maybe also legally) wrong to exploit their mistake
Why can you assume that? The contract is written clearly and specifically calls itself an arbitrage contract.
Was it unethical to exploit the fact that the mythical king didn't bother to calculate exponents? The request itself was stated clearly.
> Was it unethical to exploit the fact that the mythical king didn't bother to calculate exponents?
Yes, it is clearly unethical to enter into a contract with someone when you know that the other person would never agree if he actually understood what the contract says. Also, in many jurisdictions, such a contract would be void.
The law does not protect you from stupidity, just manipulation or deception. In my view, neither does morality. A fool deserves to be separated from his money.
If I offer to sell you 10 nickels for a dollar, it's your own damn fault if you agree.
Actually, the law often protects you from your own stupidity.
Btw, if you think that the words and the signatures on the paper are the contract, you are wrong. The contract is what you agreed to, and if there is no agreement, there is no contract.
Here is an example that I actually experienced: we proposed a deal to person A. That person agreed and sent the signed contract back. We then also put our signatures onto the contract and put it into a drawer. However, we unfortunately did not notify A that we signed the contract as well, rendering the contract void. I.e.: in my jurisdiction (and many others in Europe), it does not suffice that everyone signed a contract, one also needs to ensure that everyone knows that everyone signed the contract. Otherwise, it is invalid because there was no agreement everyone knew about.
The law requires that knowingly enter a contract and understand its terms. If this contract had been written such that they didn't realize he could reallocate investments after the fact, then you might have a point.
The law does not protect you from making bad decisions and entering contracts you probably shouldn't, provided you understand the contracts themselves. That would mean a huge majority of contracts are invalid because people frequently and routinely enter contracts which are inadvisable. (For example, subprime loans.)
Not understanding a contract and not thinking through the implications of said contract are completely different things.
The contract puts him in front of shareholders when it comes to the assets. Whatever the contract is worth, that value is his more than it is the company's.
So essentially you can invest with perfect hindsight. The counter party, Aviva, didn't write the original contact but acquired the company that did. They haven't paid out any money yet and have contested the contract many times in court, loosing each time.
It's gotten worse for Aviva as their original plan was to delay paying out to bleed him dry to make him settle, but a few Swiss banks have lent him money to live off of and lent even more so he can leaver up his bet as he's allowed to invest additional funds into this contract.
The biggest issue is that you really can't value the contract as the holder is 25 and it pays out until his death. If he lives until he's 75 its worth more than the company could reasonably find.
If you are wondering why the insurance company would write such a contract, it was originally designed to be like a savings vehicle back in the 80s. It would let you swap between bonds and equities as your risk profile changed over the course of your life.
Back in the 80's it wasn't really considered feasible to sort through all the markets and figure out in time what to invest in to make this arbitrage. But with the internet, things changed....