serco i think you are norse last speaker the statement it's great to speak with you because in truth be told i really have never heard of catastrophe bonds until upon your blog and reading about them and reading as sandy is relevant to them so before we get to sandy what are going to have to be bonds what is this market sure and it's a fairly nice market as you will have tariffs and. be ready when events like this happen like sandy that people sort of really tight notice so to put it in simple terms of catastrophe bones or aforementioned instrument the party to head to going to will protect itself against disasters while on the flip side an investor is going to buy that risk in return for an interest payment these are sophisticated investors who know what they're doing so they do this with their eyes wide open they're also known as insurance and securities and as well as covering catastrophe rests like a car a kind that can also cover life insurance health insurance or all deadlines of insurance business the market's been around and you guys are no go right ahead of

you about the market share of the market's been around since the big ninety's when there was a number of people within the insurance market who sold the saudis of catastrophe losses from the kind of events that were happening back then a lot northridge earthquake and hurrican and jerry and they realize that the saudis of catastrophe events which got into such an extent that really the capital markets and capital market investors seemed like a very good place for the risk to be able to say it because they have they the financial backing to be able to support insurers in the times of need interesting so how does this work who are the issuers of these bonds and who are the investors primarily you mentioned they're sophisticated are these institutional investors are these retail investors sure well the sponsors saw it it could be a primary us and sure so the likes of us who are travelers have issued cap bones in the past that can also be reinsurers the major global reinsurers such as swiss re and munich re of old or old. very involved in the capital markets. there's also

actually the opportunity for corporations to issue their own capital as well this isn't solely something that insurers can do on the investment side they are institutional investors in the main they're very sophisticated they know what they're doing they employ technical and statistical cap models to help them to understand the risk that typing on when they buy a cap bond so they're quite prepared to face losses if the worst happens and i really do everything they can to diversify themselves across a number of risks and also across a number of geographical areas as well so that portfolios can't be destroyed by a single event interesting so what is the upside for these investors why are these desirable instruments sure at the moment very desirable because of the wide sort of financial climate to be honest with you there's not that many assets out there that you can get a really good right of return on right now and cap bones i think of the deals that have been issued in twenty twelve the average return as

a bank nine percent so that's really attractive to investors right now but as well as the actual return is the fact that broadly correlated with the wider financial markets so they are not going to go down when stocks go down they're not going to go down when you have a solver in debt to crisis as we do at the moment largely on correlated and really the thing that triggers them and causes the losses is the events that are very strictly written into the contracts interesting and in this case given what we're saying with this super storm let's talk about the rest so what is the impact of something like sandy on this market or what could it be sure with sandy it's actually it's really hard to tell exactly what the impact is going to be at this stage it's still a days as you said at the the estimates a very preliminary and it's going to take a number of days before they're ready to any degree but there are a good number of capital. which have exposure in this area where you count bones

are issued they're structured in different ways to protect the invest the investors and also the small misses in the way that they need such some be an aggregate capital and which means that it can add up losses from a number of events they are probably the warmest that are the most at risk if anything was going to get triggered the other type which are sort of one shot one massive event will trigger them we don't think that sandy is going to be big enough to trigger any of those but for the aggregate cap almost this could be a qualifying event which means that they rode some of the protection that they provide to investors it doesn't necessarily mean investors will lose any money but there is the chance that the protection within the bone for the investors begins to get eroded a bit more ok and when you say triggered you mean that they've been no longer has to be paid because this event was too catastrophic is that what that mange yes that's why when a bomb gets triggered investors could lose

a pool should all of even a whole lot of the principle of that bond. to trigger will generally be used on the odds of the losses suffered by the spill or on an industry loss basis so how big is the actual industry loss and a lot of the capital has that are exposed to the northeast us who are trying risk our own industry spice's so really it's the total industry loss to the insurance industry that's going to really matter there are other types of triggers as well some of parametrically triggered so triggered by wind speeds are occurring but none of those are exposed in the northeast at this time on interesting thing just so that i'm straight on this as an investor in one of these the upside for you is you get nine percent yield in it in a time when it's difficult to get any yield people are chasing healed they're hopeful to get just return of their money not even return on their money so that's the upside to that the downside is that the risk is the. whether the risk is if

there is a disaster there's too much of a disaster you don't get anything back is that what i'm what i'm gathering yeah. it may be that you get something back it doesn't necessarily mean the whole boehm does last some of the bombs lose principle on a sliding scale but sensually the benefit is the correlated return that the investors can achieve which generally if you're talking about a big investor like a pension fund for example they'll put a small amount a couple of percent of their total capital into the trash people market and it gives them a very nice diversifying our site with the only risk being that i vent qualifies under the terms of the dail and the deals are very strictly written in legal terms to make sure that the investors are fully aware of what can trigger that bond interest and you mentioned pension funds which are something that you maybe don't traditionally think of investing in something that you said is very exotic as first sophisticated investors so this brings me to something that you've written about in

your analysis which is that this market is doing very well it is the second best last year i think since you've been tracking it second only to two thousand and seven why isn't doing so well right now sure there's a there's a number of factors coming into play this year of the factors is that we had the sort of extreme losses last year in the trash free market so not only a number of cash three bombs were affected but reinsurers generally faced a great deal of losses last year so capital was seen as a good wide shore up in that respect but the main factors were you hear all that there's greater acceptance of capital is now is a form of. among the sponsors so they are beginning to get more and more comfortable with this as a new sort of tool for their restaurants for toolkit among investors they will start getting more comfortable with these now and there's broader education about them people are beginning to sort of learn about days it generally takes an investor a good sort of see. months potentially up to two or three years if there are

a large institutional investor to decide to commit to this sort of market for yale is a major major issue at the moment that's driving the market there's a lot of capital actually waiting to try and get into this market but currently the market's not big enough to satisfy all of it. so you may hear more and more investors sounding like meteorologist that was steve evans he's owner of artemis you can check out more about catastrophe bonds at his website artemis dot b. . and still ahead it has been one year since the f. lobel collapse but what has changed will delve into that after the break but first your closing market numbers.

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welcome back as u.s. markets reopened today after two days closed first sandia weather related closure of a length not seen since that eighteen hundred it's heard the question of why the markets were really shut down here's the way it was posed to terence duffy of the c.m.a. on bloomberg. if we look at the scandals the problems that have gone on over the last year whether it's knight capital peregrine and the global bat the facebook deal so many investors have simply lost confidence in the market without a factor at all in the decision made on sunday to really shut the markets down what is going to bring investors back to us financial markets. now terence duffy cited macro events like the fiscal cliff is getting in the way of investor confidence but come on it is the one year anniversary of the collapse of m.f. global today and if you want to talk about bringing investor confidence back how

about delivering some justice and the global customers still haven't gotten all of their money back we haven't seen john corazon or anyone from m.f. global in orange jumpsuits or even seen civil charges from regulators even though a year ago one point six billion dollars in customer money was taken and you may think paragraph was more reassuring as there weren't charges and the c.e.o. pleaded guilty to embezzling more than one hundred million dollars from customers lying to regulators and fraud but you made these surprised at what standing in the way for some who are trying to hold regulators accountable joining me now is larry williams he is author and veterans future traitor and he's going to tell us all about this because he has been trying to get some people held accountable it hasn't

been working too well we're going to talk about why first of all thanks so much for being on the show taking my pleasure yeah just to put this in context mr williams you had money in a segregated customer account with pair or gray and quite a bit of money according to what you told me in a phone conversation we had have you gotten any back. no i haven't no i have not ok so no money back from peregrine and as we know because we've covered this extensively this fraud by the c.e.o. was going on under the nose of regulators for years he was also a fine bank statements using a phony p.o. box and while the c a t c is old similarly the regulator in response that's responsible there is what's called a self regulatory organisation the n.s.a. the national futures association which was responsible for much of the day to day policing in the auditing and in fact audited p.f.g. in two thousand and ten and two thousand and eleven it found nothing so are these

the folks that you really hold responsible. i do and i am a former member of the board member of the n.s.a. it is their responsibility they are charged with keeping the markets fair not only for their brokerage firms themselves because they can be ripped off by customers. rogue traders as an example as well as customers and clearly the n.s.a. just walked away from many duties. ok and resident the they're going to was on the board and they treated him with kid gloves and that's a great point you bring up which is that russell was on the board of the n.s.a. and you hold them accountable you want to hold them accountable for what you consider gross negligence these guys are not paid by taxpayers they are not a government regulatory body though they're given some of this authority by government regulators you want to sue what did you find well it's really interesting what i found is this this group that really set themselves up they went

to the commodity futures trading commission and let's set ourselves up they've been drawing salaries to president of well over a million dollars a year and you cut his benefits as well but they are totally immune as well i found out from lawsuits it cost me probably fifty thousand dollars a legal case to find out but i think this is. an important battle this organization is supposed to protect us they have it and they can just walk away from it they have more immunity than john cores and you're right it should be in an orange jumpsuit but the n.s.a. members will never morry about that they have no responsibility and what do you think is the consequence of that these guys get money from the industry to function a you say they get cushy salaries and yet they can't be held accountable by the industry they regulate that is correct the law is real clear that a soft regulatory agency can't be sued even for gross negligence it's almost as

though they are the government and you can't see books to the king so i think we have to come about with a new way of making accountable that's one thing being on shows like best to let people know how sad the situation is also tremendous me porton so i greatly appreciate the opportunity to be here today yeah of course when you mention the king and i did get some official who legally from your lawyer about how this works i think i asked for it in the plainest terms and here is what he said let's take a listen. the plainest terms i guess sort of the old terms that are there the king's agent and the king says you can't sue them in reality what you have is a sofer regulatory agent organization that is policing an industry that is paying for your existence but those people they're supposed to be protecting have no recourse when they feel completely at their job.

so what do you see as the solution if there is literally no recourse through the legal system. well the market always works out a solution and one is many people are stopping trading and that alone is going to make the n.s.a. hopefully wake up and realize they do need a solution that this year that to make themselves accountable which is real simple you don't need another governmental agency all you need is for them to liability insurance for errors on a mission just like any corporate board out if they had that and would feel better about the fact that we can't be ripped off by the end activity of the software good tory organization and it's important i think to talk about this issue of investors not being in the market especially on a day like today where the markets reopened people were thinking there was going to be pent up demand and then at least as of this morning i terence duffy in an interview saying it's half the volume that we would have expected already in

a year when volume has been so light he talked about some macro economic issues but to what extent do you think the global the parent grants and the failure of regulators laws they think there's a lot of things play there actually two things first of all a lot of brokers are owed commissioned by m.f. global and by peregrine a member going to get paid for honest work that they did so brokers saying you know what i'm going to find a job where i get paid so that hurts industry and the traders such as myself and and people i know throughout the world to say why would i want to commit millions of dollars to this game if i can lose all of my money not because of my bad traits but because somebody stole it right out from under the eyes of the regulators and there's no recourse so it's really going to hurt the industry the industry needs to solve the situation to shore it up again to give good foundations for traders and investors do you think one of the ways would be to not have these self-regulatory organizations that are funded by the industry but bestowed these powers by

government as well as immunity that government enjoy or there's probably a good place for. the f.a.a. and all there. is that a one or two cent surcharge on trade and set up an insurance program so most of the f.b.i. c.s.l. i see or have an insurance policy to cover their off their errors and omissions that's a simple process to do it doesn't take a rocket science it doesn't take another bureaucracy it doesn't take a senator to suggest that they should do that on their own and you've been in this industry for a long time you've been trading for decades is this the worst you've seen it in terms of the industry's confidence in the regulators it is in fifty years of trading and it's been a little bit over fifty years now i've seen everything come and go. at it there's always been the problems here and there's been bad group there but my gosh to this

magnitude i never imagined that it would be to this magic magnitude and this depth defeats to see people are former senators still literally still i think one of the billion dollars it disappears to see brokerage firms collapse with no support from the government or the the regulatory agencies that was never anybody's imagination not in their worst nightmare wow well i appreciate you for being on the show and telling us this story a year after the collapse of and that's global when it does feel so little is changed i should also mention to our viewers about why you wouldn't just go forward with that suit any way you can actually get docked with sanctions and sees for filing a claim that is found to be not meritorious or some kind of legal term that maybe i messed up but that's what you're learned told me earlier so thank you for sharing the story larry williams author and veteran futures trader. thank you.

all right let's wrap up with loose change at dimitri i want to talk to you about the interview we had earlier on this whole idea of catastrophe bonds and hedging against the risk of not the financial system not the mortgage market not be european sovereign debt crisis but the web what you think of that i think this is really interesting actually this was a pretty pretape interview because steven is located in london so after hearing the interview i had some questions for him and i gave him a call because her first heard this i thought immediately i feel like some of things you said as far as people really understanding the risk models and going in with their eyes wide open i think there are a few points i want to make number one i think this is an example of how. financial

innovation can sometimes get a bad about rap when it shouldn't because this clearly addresses risks it does a good job of trying to spread those risks for example taking away from insurers or reinsurers and putting them into a broader capital base however there's an important point to note here and that is the push for yield right the very low rates of interest that the fed and other central banks have artificially created have created bubbles right they create a bubble in the housing market so financial innovation in their securitization of that that's is that's really a bad thing you did the exact same thing and in some ways and yet the very low interest rate environment caused a boom in that securitization a boom in home building and a credit bubble in this case i could see a perfect example i'm not saying this will happen but this market but what i'm saying is when you have very low rates of interest you can incentivize let's say by this through this marketplace and said that. insurers the issue insure insurance at lower premiums create a boom a small small boom in that industry and basically create create

a bubble in the insurance market now again i want to make clear this is in the mortgage market so much smaller market. and that's important so so i thought that was interesting and i think i think is interesting is in general there's whether derivatives market i would be kind of prices and i'm a big fan of free market and i would like to see if there is some way that we can use the weather derivatives market which are from understand is not necessarily that big or maybe the options market is but is there any way to price in or figure out what investors think is the likelihood of catastrophic events going forward in other words how like how real is climate change because it's a debate that people have openly and academic market way and on the other like this or you're saying it's interesting prices one thing about betting on the weather at least you're betting on something that may be unpredictable but it's not being manipulated in the way that the ecosystem of the economy is by central bankers what gets back to your issue of yield that's not you know maybe people would rather risk

the weather then central planning it's a good point that goes back then correlated aspect of it which is that it isn't the the weather is not correlated to the risk that in the financial markets to make sure before we go because we're talking about risk we're talking about not just natural disasters and this audit came out that japan tsunami funds have been used on things like paving roads in other places advertising for the tallest building whaling research does this get to the issue of government allocating this money because what i find is case after case too where you hear non-profits misusing money to so what do you think is the solution there i have to get a second life as i listen i just think it shows how corrupt governments are and how it's one thing i like about wanting to redistribute funds and then when you look at it in practice you see just how bad government is doing it's true but you see the same thing with nonprofits. we're going to have to leave this open ended maybe you can tell us what you think of that's all we have time for thanks for watching come back tomorrow and the meantime you can follow me on twitter go to our you tube hulu

or facebook and have a good night. mission

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