Nathaniel Rich: Odds Against Tomorrow

Mitchell sat with this for a second. “What’s in it for them? The clients, I mean. If another earthquake comes, they’re doomed, no matter what advice you’ve given them.”

“If a disaster does occur, we serve as a hired scapegoat. We indemnify you when your insurance company won’t.”

“We’re talking great fires, twisters, solar storms.”

Charnoble nodded. “Suitcase bomb, water supply poisoning, hantavirus. In court, the corporation can testify that they hired FutureWorld, a risk management specialist. They paid us eight hundred and fifty thousand dollars a year—”

“Eight fifty?”

“That’s just the retainer. The point is that the client can say, ‘If our business was not sufficiently prepared, it is the fault of FutureWorld, whom we hired to advise us — at the formidable rate of eight hundred and fifty thousand dollars — for this exact service.’”

Mitchell couldn’t figure out why Charnoble was trying to win him over.

“So we would pay for the right to blame you.”

“Exactly,” said Charnoble. “So you can’t be accused of negligence. This is, in legal terms, a buck-passing. A ripcord. FutureWorld serves as a get-out-of-jail-free card. In a manner of speaking.”

“So you’re offering catastrophe coverage. You’re offering a service that insurance companies no longer offer.”

“I’ll put it like this. When, after 2001, insurance firms stopped providing catastrophe coverage, a void was created in the market. We plan to fill that void.”

“But how?” asked Mitchell. “I mean, if a worst-case scenario did occur, wouldn’t FutureWorld have to pick up the bill, like an insurance agency? One disaster and you’d be bankrupt.”

“No,” said Charnoble. His fingernails were working half-moons into his palm now. He seemed pleased with himself. “No, we wouldn’t have to pick up any bill.”

“Who, then, would pay?”

“Nobody,” said Charnoble, and it was as if a white sheet of paper had passed over his face. His features became flat and blank. Even his voice had lost its modulation. “Nobody,” he said, “pays at all.”

Mitchell suspected that Charnoble had accidentally said something he wasn’t supposed to say.

“You’ve left something out,” said Mitchell. “I’ve added it all up, and it doesn’t come out right. You protect your corporate clients. But who protects you? What protection do you have that an insurance company doesn’t?”

Charnoble laughed. “You’re good at mathematics.”

“This is only basic algebra. But a variable is missing.”

Charnoble seemed to be weighing something in his head. On one side of the scale was prudence. On the other side was his pride. A grin slowly started to work its way across his face and Mitchell could tell that pride was tipping the scale.

“How familiar are you with the concept of limited liability?” said Charnoble at last.

“I didn’t go to law school.”

“Let me try again. Two weeks after the Seattle settlements were announced, the governor of New York signed a routine piece of legislation called the Recommit to Civil Service and Pensions Act. It moved money between different state retirement funds, but that doesn’t matter. Like any bill in this state, it contained earmarks — funding for a hospital in Syracuse, a park in Batavia, a salmon-counting project in Lake Ontario. But none of that matters either. What matters is that the state senator from the Twenty-fifth District — that’s the district that includes Wall Street — inserted his own earmark. It’s one sentence long. It offers what lawyers call ‘a defense to liability claims.’ It applies to any property owner in possession of a building with an occupancy greater than two hundred persons.”

“Just about every office building in the state, in other words.”

“That’s the first part of the sentence. The second part says that if the property owner has made a ‘reasonable, good faith effort’ to protect his building against acts of God — by, for instance, spending a substantial sum on precautionary measures — he is indemnified. He can’t be subject to civil suits like those we saw in Seattle.”

“And that’s it?”

“Similar limited liability statutes were passed after the savings and loan crisis, after nine eleven, after Bernie Madoff. It’s nothing new. You just have to know the right state senator.”

This man was up to tricks. But there was a solid and compact logic to what he was describing. The first rule of investment was that chaos breeds financial opportunity. And this was a chaotic time. Mitchell was beginning to see it now.

“We make recommendations to our clients about how to reduce their exposure to catastrophe,” said Charnoble. “But we’re merely consultants. If our recommendations are insufficient, we’re not liable. And our clients, as long as they pay for our services, are not liable either.”

Charnoble paused to let that sink in.

“Think of a money-laundering operation,” he continued. “Dirty money goes in, clean money comes out, no one breaks a law, and everyone is cleared. And everyone is rich . We protect our clients against risks, and we protect them from lawsuits. The statute protects us. And the good senator from the Twenty-fifth District will not have to worry about fund-raising this year. Everyone wins. In a manner of speaking.”

“So you just happen to know the right state senator?”

“Not me — I don’t. But Brumley Sansome’s legal counsel does.”

So Charnoble was a Brumley man. That meant he was either a genius or a crank. He had impressed powerful people in his past.

“That makes sense. Only Brumley would devise something this devious.”

Charnoble’s grin was a fault line splitting open a freeway. “Look, these old shops — they’re like spiderwebs.” He gestured at the spreadsheets on Mitchell’s desk. “We’re the flies. Before I started FutureWorld, I was just like you — a quant. I would’ve been stuck there forever, pricing risk, valuing employees’ lives. The same grunt work you’re doing at Fitzsimmons.”

Mitchell turned the spreadsheets facedown.

“After Seattle,” continued Charnoble, “Brumley saw an opening. That’s what they do, after all. They see windows of opportunity and they jump through them. They understood how consulting could indemnify. It’s an old trick, really. McKinsey, Bain, BCG — they’ve been swiping clients from the old insurance Goliaths for more than a decade now. Consulting firms are more nimble, and much less regulated, than the insurance multinationals. Seattle only confirmed that we don’t even have to compete with insurance firms for catastrophe money. Catastrophe is all ours. We’re going to make a killing.”

“In a manner of speaking.”

“Exactly!” Charnoble’s eyes glittered like mica. “Brumley spun FutureWorld into its own company — the way JPMorgan did back in the nineties with RiskMetrics. They needed a quant to lead it, and I was there.”

Mitchell had studied RiskMetrics in Advanced Financial Engineering. The firm’s statistical model was now obsolete, but it had been the pioneer in the field, the Ford Model T of the risk industry. For all his sublimated deviousness, Charnoble knew the literature. He had mastered Risk; he had studied the canon.

“Brumley doesn’t want our competitors to catch on, at least not until we’ve cornered the market. So we have our own office, our own LLC, our own stationery.”

“Where is FutureWorld’s office?” asked Mitchell.

“Downstairs. Second floor. How do you think I got here so fast?”

“Oh. Right.”

“It’s temporary, though, this address. Brumley leased the office before I was brought in. It’s not good for FutureWorld to be in the Empire State Building. Too hot.”