In Nature’s Casino is a Michael Lewis article from the NY Times Magazine in 2007 nominally about hurricane insurance, but also about making money in chaotic and hard to predict markets. It’s fitting today, with Irene fever gripping the East Coast. I’m pretty sure I posted this already.
But there was an exception: an American so improbably prepared for the havoc Tropical Depression 12 was about to wreak that he might as well have planned it. His name was John Seo, he was 39 years old and he ran a hedge fund in Westport, Conn., whose chief purpose was to persuade investors to think about catastrophe in the same peculiar way that he did. He had invested nearly a billion dollars of other peopleâ€™s money in buying what are known as â€œcat bonds.â€ The buyer of a catastrophe bond is effectively selling catastrophe insurance. He puts down his money and will lose it all if some specified bad thing happens within a predetermined number of years: a big hurricane hitting Miami, say, or some insurance company losing more than $1 billion on any single natural disaster. In exchange, the cat-bond seller â€” an insurance company looking to insure itself against extreme losses â€” pays the buyer a high rate of interest.
The article is fascinating. Load it up on your iPad now so you can read it by battery when your power goes out on Sunday.
Here’s a bonus Lewis column from 2005 I found while looking for the above. It was written a couple months after Katrina and talks about how someone was about to make a buttload of money in New Orleans.