Death Benefit Read online

  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.

  7.

  COLUMBIA UNIVERSITY MEDICAL CENTER

  NEW YORK CITY

  MARCH 1, 2011, 7:30 P.M.

  Off by themselves, Pia, Lesley, and Will were sitting in the mostly empty hospital cafeteria nursing cups of postprandial tea and coffee. Seeing what Rothman and Yamamoto were working on had left each of them shell-shocked. As medical students, they were well aware from an academic standpoint what was being done in the lab and having seen it with their own eyes made it real and concrete. They’d been to the future, and it was difficult to absorb.

  “I can’t get over it,” Lesley Wong said. “I’m still blown away. Growing organs from a patient’s own stem cells. Something like that is going to revolutionize medicine.”

  “It’s certainly going to revolutionize the care of degenerative disease,” Pia said. “It’s going to provide cures instead of just treating symptoms.”

  “Down the road we could grow our own organs and freeze ’em for when we need ’em,” Will said. “Hey, I wonder how Columbia divides the cash on a medical breakthrough like this. This is going to be huge. Yamamoto said that the university has filed patents, but don’t you think that Rothman and Yamamoto have to get some kind of cut? Don’t you think, Pia?”

  Pi
a had come with Lesley and Will not because she wanted company per se, but because she still felt unnerved by what she had seen and wanted to talk about it. After Dr. Yamamoto led them out of the inner lab with the organ baths that morning, they’d settled in a corner of the lab with the intention of discussing tissue culture fluid. Instead they couldn’t stop talking about the progress Rothman had made in organogenesis. As interested as they were, they realized that reading books from the library and doing Web searches was fruitless. The textbooks on this stuff hadn’t been written yet.

  “You’re asking the wrong person,” Pia said, responding to Will’s question about Rothman and Yamamoto getting a cut. “Money and I don’t have much of a relationship.”

  “But he’s gotta be looking at billions here. Doesn’t he? I’m going to call my dad, he’ll know someone who knows.”

  “Your dad?” Lesley said.

  “Yeah, his broker is pretty well connected.”

  “I don’t think you should be talking about any of this to others,” Pia offered. “Particularly people outside the medical center. Remember what Yamamoto said. At least during this month while you’re working there or until the key publication is released.”

  “You might be right,” Will said. “But it can’t be that much of a secret, as Yamamoto admitted. But certainly it’s best not to get on Rothman’s wrong side, especially with his reputation.”

  “I’m just pleased to be part of the scene,” Lesley said. “I’d be happy just checking bath temperatures for the month.”

  “After all the terrible stories I’ve heard about Rothman’s treatment of students, I was expecting the worst today,” Will said. “But hell, he seemed very nice to us. Maybe he didn’t know we were coming today or didn’t know who we were?”

  “He had to know who we were,” Lesley said. “I think he was using us to practice showing off the progress they’ve been making. But whatever the reason, I don’t care. I’m happy just to have been able to see it.”

  Inwardly, this was exactly what Pia was thinking. It had been a magical experience for her to visit Rothman’s inner sanctum. It had been a long wait, but she didn’t care. Nor did she feel any resentment that Lesley and Will had gotten to do it on the very first day of their elective. For Pia, it was as if she had entered a different physical dimension. The room, and what was happening inside it, seemed to belong to a realm quite apart from all that lay outside. What she remembered was a white space, glowing blue, like something from a science fiction movie.

  “It was one of the most tantalizing experiences of medical school,” Will said. “I loved it.”

  “Me too,” Pia said. “I could have just stood there and watched baths all day.”

  “Hey, everybody,” a voice announced. It was George Wilson, standing at the foot of the table, carrying a cafeteria tray. He’d just emerged from the food table line. “Is this a private party or can a tired radiology extern join you?”

  The three students eyed each other. It was Will who spoke up: “If it isn’t Mr. Wilson! Hello, George.”

  “Will, how’s it going?” George said. He tried to conceal his displeasure at seeing McKinley sitting at a table with Pia.

  “You know Lesley Wong,” Will said, playing the host. “And Pia, of course.”

  “Lesley, hi, how are you? Pia, how was your day with Rothman?”

  George was feeling extremely uncomfortable as he’d not yet been invited to sit down and so stood awkwardly next to the threesome’s table. It was late, and he’d managed to get to the cafeteria just before it closed. The last person he expected to see there was Pia. The second-to-last person was Will McKinley, who usually held forth in the medical school dorm cafeteria chatting up all the women medical students.

  “We were just talking about it,” Pia said, unaware of George’s discomfort. Social cues were not one of her strong points. “Lesley and Will are also spending their electives in Rothman’s lab. And about the day? It was . . . let’s say interesting.”

  “Crazy Rothman saves the world,” Will said.

  “What do you mean by that?” Pia said. There was a sharpness in her voice.

  “Nothing, nothing,” Will said, holding up his hands as if he expected Pia to attack him. “It’s known you worship the guy—”

  “I respect the guy—”

  “Listen, it’s fine, he’s clearly some kind of crazy genius.” The look on Pia’s face persuaded Will that he might be better off changing the subject.

  “What we were wondering,” Will said, “is how much money Rothman stands to make if he finds investors to back him.”

  “You were wondering,” Lesley said.

  “Yes, I was wondering. There’s got to be big money in this. Rothman’s sitting on a gold mine. Don’t you think, George?”

  “I’m not exactly sure what you’re talking about,” George said. “But I can tell I’m interrupting a meeting here.” He started to leave, but Will grabbed his jacket just above the elbow and restrained him. “Don’t go! Take a seat!”

  George glanced at Pia, and she motioned with her head for him to sit down, which he did, unsure if it was the right move.

  8.

  GREENWICH, CONNECTICUT

  MARCH 1, 2011, 9:10 P.M.

  Edmund Mathews was back at his front door, and again it was Russell. This time Russell hadn’t called ahead; he simply texted Edmund on his BlackBerry to say he was coming over. There was only one reason he’d come back. Edmund figured he must have found out who was shorting LifeDeals.

  “Edmund. We need to talk.”

  “Tell me what you found out.”

  “I need a drink and so will you. Can you fix me a scotch?”

  Edmund knew Russell liked the eighteen-year-old Talisker single malt he kept in the den, so he walked Russell over to the room and closed the door behind them. Edmund had been sitting in there reading some research and had started a fire in the grate. The room smelled slightly of smoke, and when Edmund opened the bottle, the peaty aroma of the whiskey added to the effect that they were in a Highland lodge.

  “So what do you know?”

  Edmund poured two drinks and handed one to Russell, who stared into the fire, an elbow leaning on the mantel.

  “I’m a big boy, Russell, I’ve heard bad news before. Out with it!”

  “Gloria Croft,” Russell said, snatching a glance at Edmund, then throwing down all of his drink in one shot.

  “Excuse me? I thought for a second you said Gloria Croft.”

  “I did. That’s who it is, Edmund, Gloria freaking Croft. She’s doing it plain as day through BigSkies.”

  “You’ve gotta be kidding me. You have got to be fucking kidding me!”

  Edmund was yelling nearly at the top of his voice. This was why Russell had been concerned—he knew Edmund was going to flip out. There was a knock at the door, and Alice, Edmund’s wife, popped her pretty blond head in.

  “Oh, hi, Russell. Edmund, Darius is going to bed. . . .”

  Alice took one look at her husband’s face twisted in a rictus of unalloyed rage. She could see it would be a hopeless task to get anything out of him in this state.

  “I’ll say good night for you, then. Bye, Russell,” Alice blurted, and withdrew, closing the door behind her.

  The interlude cut short Edmund’s tirade. He poured himself another drink and then one for Russell, closed his eyes for a second, and took a deep breath. Why did it have to be Gloria Croft? “You’d better tell me everything.”

  Russell sat down on a low padded stool by the fire. Edmund stayed standing.

  “I made some calls. It only took two, actually. I called the guy who told Teddy Hill he heard about the shorting and the guy gave up his source. It was someone I’d met before, at some mortgage convention in Vegas. He runs this bullshit financial newsletter. He got it from the horse’s mouth.”

  “The horse’s ass, more like. Did he say why she’s doing it?”

  “Didn’t say much. I think once he’d told me he thought bet
ter of it and got off the phone pretty quick. He got nervous. She’s a big player. BigSkies has a lot of money.”

  Edmund was experiencing a less-than-pleasant sense of déjà vu. Through her hedge fund, BigSkies, Gloria Croft had taken huge positions betting on the failure of the CDOs issued by, among others, Edmund and Russell’s desk. She’d taken the positions early, in 2006, when no one else was doing it and when it was cheap to do. Hundreds of thousands of dollars could turn into tens of millions. What she was indicating was that she thought the AAA-rated mortgage-backed bonds would fail and jeopardize the futures of Wall Street giants like Bear Stearns and Lehman Brothers. Almost no one agreed at the time: There was no chance their stock could go so low. But it did, and it went lower.

  Russell and Edmund were quiet, Russell staring into the bottom of his glass, Edmund at the fire hissing and spitting in the grate. He held back the fire guard and popped another log into the flames.

  “She’s got some balls,” Russell said finally.

  “She does.”

  “This is different, though.”

  “You’re right about that.”

  Russell and Edmund’s thinking was following the same track. Subprime mortgages were a disaster; as assets, they were just terrible. In their “Life Settlement” paradigm, the debtors were the nation’s largest insurance companies, some of the richest institutions in the country. The bottom line was solid, encapsulated in one of Edmund’s favorite sayings of recent months: What are the insurance policy holders going to do, not die?

  “So what is she doing?” Edmund said after another long pause. “It doesn’t make sense. We know the numbers, right? We’re solid all round. Actuarially, we did the worst case—people living a little longer for God knows what reason—and we’ve taken those tolerances into account. Unless she’s shorting you and me personally. But she’s too smart for that. Way too smart. There’s gotta be something she sees in the numbers.”