CAT BONDS. This article by Michael Lewis (author of MONEYBALL) will disappear soon. Kids, I suggest you read it while you have the chance. Lewis describes catastrophe bonds (“cat bonds†for short). If you were to buy a catastrophe bond for a million dollars which is triggered by a hurricane hitting Miami some time in the next five years, and no hurricanes hit Miami during that period, you would get your million dollars back at the end of five years and would have collected a high rate of interest during the period (a high rate of interest to compensate for the risk you ran). If there were a Miami hurricane during the period, you might get only some of your million dollars back. If the hurricane were bad enough, you would get nothing back at the end of five years. Insurance companies that insure against rare events with enormous damage will sell cat bonds to spread their risk. The market has taken off since Hurricane Katrina.
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Buying a cat bond sounds a bit like becoming a “name” for Lloyds. I think the differences are that a name committed to a particular syndicate that then wrote a portfolio of insurance policies and a name had unlimited liability if there were losses. A few years ago a number of syndicates at Lloyds got wiped out, leading to lawsuits, I think filed in the US, alleging that there had been inadequate disclosure. I remember reading, with what I guess must be schadenfreude — which seems to be too satisfying to feel guilty about — that some of the names had gotten the impression that they just got nice checks without any downside. One young woman remarked that she should have warned her parents when she noticed that all the people she knew who went to work for Lloyds were well born, well connected, and stupid. I think that Justice Breyer had to recuse himself from Lloyds cases when he was on the First Circuit because he had been a name in quite a few syndicates. Elmer
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