Beware the social distortion of money

The world’s most favored and heated topic of conversation is money. It dominates every facet of life, and it is true to say that most people handle it badly. Governments manage it particularly poorly, as I have mentioned often in other articles. This being so, I decided to do a bit more in-depth reading about money over the past few weeks.

My first port of call was a book called ‘What Money Can’t Buy’. It is an absolute classic, written by Michael Sandel. Its sub-title is ‘The Moral Limits of Markets’ and it vividly outlines the extremes to which people go in using their money to gain them privileges that others cannot aspire to.

But, in doing so, they really gain nothing of consequence for themselves or anyone else. They have simply found yet another innovative way to waste their money, while they degrade the dignity of humanity.

What concerned me most was the way in which Sandel reveals how little the American financial markets have learned from the Great Financial Crisis of 2008. There is a chapter in his book about a new sub-prime market in Life Assurance.

Every day, American Insurance Companies are aggressively marketing to senior citizens a financial product that they call a Life Settlement Policy. These policies are really a blatant bet by outsiders on the age that an unknown insured person will die.

The policy is marketed to an oldie on the basis that he or she will never pay a premium because the insurer will sell the policy immediately to an investor who will get all the money when the person dies — provided that the investor pays the premium every year.

For the insured person, the attraction is that the investor is required to make an immediate cash payment to them for the right to bet on his or her life, usually enough for them to take a pleasant world holiday that may otherwise be beyond their reach.

The investor is usually a bank, which then packages hundreds of these policies into bonds that are sold to other investors in just the same way that mortgages were marketed at the height of the sub-prime fiasco. The bondholders then take out insurance against loss with different insurance companies, which then sell those policies as bonds too. And so it goes on indefinitely until an Eskimo in the Arctic owns a share of a policy on your life.

The viability of all this for the investors depends on lots of old people dying sooner than they are expected to. This presumption grows more doubtful every day, as longevity is now a rapidly growing feature of the life of the world. It is just no longer wise to bet on people dying early. This is why the original life insurer is in the game. They are wagering that their policyholders are very likely to live a long time.

In case you feel it necessary to lie awake at night worrying about the forthcoming crash of life settlement policies, you will become even more sleepless when you know that the sums insured now cover trillions of dollars and are nowhere near their zenith. This means that the crash will be a big one and you will be better off if you are sleeping at the time.

Just as a slight diversion to emphasise what social distortion money can cause, Sandel tells us about the day when Mark McGuire hit the most home runs in a season in the history of American Baseball. The guy who caught the ball in the grandstand was able to sell it at auction for three million dollars.

A couple of seasons later, when someone broke McGuire’s record, the chap who caught the ball that day was punched and kicked until he gave it up. Twenty people who were involved in the brawl spent time in hospital and the battle for the ownership of the ball wound up in the courts.

When McGuire broke another record the following season, a guy called Tim Forneris caught the ball and went to the players dug-out to give it to McGuire as a personal memento. President Clinton was so impressed that he invited Forneris to dinner at the White House, the photo of which Forneris proudly displays on the mantelpiece of his humble home.

The financial media attacked Forneris for being an idiot. They valued the ball at four million dollars. You can tell me who was the wise man in all of this.

A little sobered by the above, I took my research into the realm of the corporate world and read ‘Deals from Hell’ by Robert Bruner, a book that outlines 12 mergers of major American corporations that went badly wrong because financial acumen is not improving.

All of these mergers failed because the directors and major shareholders of the merging companies were incredibly greedy, and sought values far in excess of what the companies were really worth. Their aim was not to create great new companies that would provide financial security and good returns for mum and dad investors, but to make as much money as possible, as quickly as they could, and get out before the markets woke up to them.

As soon as these deals were done, the executive staff of the merged entities took massive rises in salaries and bonuses, justifying this by saying that they were now managing a bigger company and were entitled to be paid handsomely for the increased responsibility. They then implemented the cost cutting that everyone says must happen when you merge companies.

So, they sacked thousands of workers in order to pay for their own salary rises. Some of the great mergers then collapsed altogether, but the perpetrators had already cashed in their chips and left — prime examples being the mergers of Penn Railroad with New York Central and Enron with Dynergy.

You come to the conclusion that none of these guys understood the chaos caused by the abuse of money, and did not have a clue how to live with it responsibly.

All of this reminded me of the fact that, a quarter of a century ago, I wrote a book called ‘Living with Money’ which Hodder and Stoughton published for me in Wellington, New Zealand. We only printed a limited edition of 2,000 copies, and it sold out. They invited me to update it, but I was too busy on other matters at the time and let a splendid opportunity pass.

Now, the world has changed so much that much of what I wrote back then does not now apply to life, as it is today, where money is far more complex. I got out a copy last week, dusted it down and read it again.

Without being egotistical, I reckon that a rewrite could spark some renewed interest in how we can live peacefully and successfully and honestly with money and enjoy financial independence, while living a creative life that is filled with good things.

But, as Cecil Rhodes said on his death bed: “So much to do, so little time to do it.”