Death and the market: the peculiar dealings of Joseph Caramadre

How much is enough to compensate someone who is about to die for allowing someone else to financially benefit from their death? leiris202/Flickr

Is profiting from the deaths of others wrong? In an interview on This American Life, Joseph Caramadre maintains it’s not. At least, he says, “Not if it’s done morally, ethically, and legally.”

This month, Caramadre will be tried in Rhode Island’s US District Court on 66 counts of crimes including conspiracy and identity fraud and theft. Legality aside, as Planet Money’s Alex Blumberg noted in the interview, “The moral and ethical parts is where it gets blurry.” Why? What has Caramadre done?

No such thing as a free lunch?

In the 1990s, Caramadre became interested in financial products sold by insurance companies called variable annuities (VAs). With life insurance, if the insured party dies, the policy pays out to a beneficiary. Think of VAs as a kind of portfolio investment that also pays out a “death benefit” to a beneficiary if the nominated “annuitant” dies.

If, at the time of the annuitant’s death, the portfolio has increased in value, the beneficiary gets the gains. If it has decreased in value, the beneficiary gets the original investment back. So? Lots of upside, limited downside risk (derivatives fans; think call options). Well, the downside risk is limited financially, but you still have to die for this thing to pay out.

Except, as Caramadre discovered, you don’t. With VAs, an investor could nominate a third party as an annuitant. Just get someone who is dying to be the annuitant, and as the investor you don’t have to do the dying anymore. Better still, you can sign up to be both the investor and the beneficiary.

From ProPublica’s piece on Joseph Caramadre by Jake Bernstein. http://www.propublica.org/article/death-takes-a-policy-how-a-lawyer-exploited-the-fine-print

Caramadre paid people $2,000 just for proving they were terminally ill, before then offering them as much as an extra $10,000 if they signed on as an annuitant. He even signed some people up to be annuitants for more than one VA.

Personal, or just business?

A ProPublica piece quoted Stephanie Porter (whose mother Caramadre paid) saying it was “slimy” that she lost her mum while Caramadre got to make a profit. Caramadre maintains that all kinds of businesses are tied to people dying; his was just one more. The annuitants got paid, so it was win-win.

As Dealbreaker’s Matt Levine put it, “They got $2,000 for signing a piece of paper, and it’s not like that signature lost them or their survivors any other benefits.”

But even if this were just business, and even if we stop ourselves from being “squeamish” (as Caramadre put it) about tying cash flows to death, three principles in economic theory can help us think about whether what Caramadre did was reasonable or not in the context of a market transaction. At least one of these principles suggests that it may not have been, and that we have good reason to feel squeamish about this business after all.

Theories of market transactions

How do economists think of someone being better off in a market transaction? Well, they have several ways of doing this. One approach is to consider whether an activity has left all parties involved at least as well-off as they were to begin with; if so, it is deemed a “Pareto improvement”, and is considered to be fair insofar as no one has been made worse off.

Another is to consider the extent to which transactions or exchanges are voluntary and (if both parties have perfect information) therefore mutually beneficial; if two parties opt to exchange something of their own volition, then it must have been because they thought they were each getting reasonable value.

A third idea relates to the claim that (if a market is perfectly competitive, with perfect information and lots of competitors), everyone participating in the production of a good or service will be paid the value of their contribution to the productive process based on the market price. They receive at least as much as their effort was worth.

I’m not suggesting that activities should necessarily be judged to be fair or not based solely on these abstract principles; rather, we can use each of these to ask questions and structure our thinking about Caramadre’s case.

Was anyone worse off? Was it voluntary?

I suspect that it’s the first and second of these principles that people have in mind when making arguments like those made by Levine, or indeed by Caramadre himself. They essentially stated that it was a Pareto improvement, as no one was made worse off – at least, not financially.

Alongside this claim of Pareto improvement is the intimation that people wouldn’t have willingly signed on as annuitants unless they stood to gain, and that no one forced them to do it. The arrangement may indeed have been mutually beneficial, but the indictments allege that Caramadre may have misled or manipulated people into signing on as annuitants.

If the court case reveals this to be the case, then clearly this was improper. But even if the court finds in favour of Caramadre, and even if you defend the dealings as based on the first two economic principles, I think the last principle raises an additional and important question.

Did the annuitants receive the true value of their contribution?

For Caramadre, the signatures of these dying people were factors of production; only with those signatures could he produce these VAs for his clients. And, as noted above, the annuitants were paid for their contribution, right? Well, yes. And one might appeal to the second principle and maintain that as they volunteered, they must have felt it was the right amount.

But did they know how much their contribution was really worth? Had they known the real market value of these assets, had they had perfect information, might not their perception of that value have changed?

Ideally, to know what the VAs were worth to the investors, we’d like to know the price that they paid. Public information on this is not readily available. But if you read up on the substantial benefits the variable annuities presented to investors (along with the allegation in the indictments that the insurance companies were defrauded of $15 million), it seems they were worth a lot, and the suggestion that Caramadre made millions of dollars selling them indicates investors were willing to pay quite a lot.

The indictments suggest that in some cases, the value of the gains to the investors (or even the fact that investors stood to gain at all) was not conveyed to the potential annuitant (see 40 (e) of the indictments). Indeed, the gains were inherently variable and may have been hard to describe.

While at least one annuitant, Charles Buckman, was clearly aware that other parties would benefit from his death, and even noted that he didn’t care how much they made, it is unclear if he was given any idea how much it might have been.

So were these dealings wrong?

Perhaps Caramadre’s lawyers will mount a defence similar to the “market-maker” defence used by Goldman Sachs executives in 2010, and claim that as a middle man, his moral obligations regarding disclosure differed from other parties in transactions.

Perhaps the courts will decide that responsibility for finding the true value of the asset that their signature would create lay with the potential annuitants (though it would be a pretty tough caveat emptor given the complexity of the assets and the fact that many of these people were elderly and seriously ill).

But it seems to me that even if this was a voluntary and Pareto improving exchange, it still matters whether or not the people Caramadre approached were aware of or able to understand the true value of the asset they were crucial in constructing. And even if they had been made aware, the annuitants didn’t have much bargaining power, as Caramadre was the only guy offering this deal - if they didn’t like the offer he could just move on.

Economists such as Arthur Pigou and Joan Robinson held (for different reasons and with different reasoning) that if a worker is paid less than the value of their marginal product, they are being exploited. If annuitants provided signatures for Caramadre’s production of VAs for less than those signatures were worth because they didn’t realise the true value of the VAs themselves, or because Caramadre’s market power as the only product of these VAs reduced their bargaining power, we can think of the annuitants as having been exploited in this sense.

This case is a good reminder of the difference between what seems like a fair bargain when you’re dealing with a monopolist in the dark, what you know to be reasonable when you have all the information in a competitive market, and how economic principles can help us distinguish between the two.