
Arbitrage Discovered (2015) - Tomte
http://www.bloomberg.com/view/articles/2015-02-27/arbitrage-discovered
======
chollida1
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....

~~~
pmiller2
> 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.

~~~
Bromskloss
And Aviva has an incentive to make him "go out of business". :-|

~~~
pmiller2
He only has to stay afloat long enough to be able to buy the company. ;)

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arcticfox
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.

~~~
laughinghan
According to Footnote 5, most of them have settled:

    
    
        Except the other holders of THIS policy! Who exist, though most of them
        have settled, apparently for relative peanuts.
    

[http://www.bloomberg.com/view/articles/2015-02-27/arbitrage-...](http://www.bloomberg.com/view/articles/2015-02-27/arbitrage-
discovered#footnote-1425055756515)

~~~
arcticfox
Good find, thanks.

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hkmurakami
It says something about a writer when I see a TLD and immediately think
"please please please be Matt Levine" as I click the link.

Are there any writers that elicit this reaction from you guys? Would love to
be made aware of any.

~~~
0x0
You see ".com" and think of one guy? :)

~~~
hkmurakami
whoops! you got me. Have an upvote. :)

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morgante
Does anyone know if there have been updates on this case since then?

~~~
saalweachter
The Google News doesn't have anything more recent than 2015. I wonder if there
was a settlement with an NDA?

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theseatoms
How is this company worth $12B? Is it hard to short? The $12B equity valuation
would imply slim odds of Max-Hervé George being fully paid out.

If not, what information are we missing?

~~~
ryankupyn
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.

~~~
vasilipupkin
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

------
Hermel
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.

~~~
halter73
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.

~~~
Hermel
> had to expect

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).

~~~
morgante
> 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.

~~~
Hermel
> 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.

~~~
morgante
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.

~~~
Hermel
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.

~~~
morgante
I'm well aware of how contract law works.

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.

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bhickey
Is he taking investments?

~~~
HappyTypist
He's using his estate as collateral and banks have loaned him boatloads of
money.

------
Bromskloss
Could Aviva pay out all its assets as dividends, or move them to a different
company, and then just shut down?

~~~
maxerickson
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.

