"When he was seven years old, Max-Hervé George was given a magic ticket by his father. It lets him turn back the clock, to invest with perfect hindsight week after week, steadily accumulating a fortune.
The ticket is a life insurance contract and Mr George, now 25, has fought for years in the French courts to preserve its magic. He could be a billionaire by the end of this decade and, by the end of the next, his contract would be worth more than the insurance company which stands behind it, Aviva France.
There is no mystery to the financial magic, however. Instead it is a story of grand stupidity, of how a French insurer wrote the worst contract in the world and sold it to thousands of clients.
The company was L’Abeille Vie. In 1987 it began to offer a special deal to its richer clients, a Fixed Price Arbitrage Life Insurance Contract.
Life insurance is a popular savings product in France, and typically the customer allocates their money among different investment funds offered by the insurer. But this contract was not typical: prices for the funds were published each Friday, and clients were allowed to switch funds at those prices anytime before the next price was published, even if markets moved in the meantime.
L’Abeille Vie called this an arbitrage, but really it was a gift. Is the stock market up this week? Just call your broker to buy it at last week’s price and pocket the difference."
...
I'm conflicted about this. On one hand, there's a part of me that likes the fact they're sticking it to a bank. On the other hand, are we benefitting as a society because of this?
> are we benefitting as a society because of this?
Arguably yes, though indirectly: society benefits from having a legal system that upholds contracts, even if one of the parties later changes their mind.
Or to put it another way - the harm to society of enforcing a ruinously bad bargain against one bank is possibly less than the harm that would be caused by the precedent that banks can sometimes wiggle out of bad bargains they make.
Maybe. Certainly in the UK there are many cases where "unfair" contracts can't be enforced, though, which presumably stays as law because it is seen to be beneficial.
> Certainly in the UK there are many cases where "unfair" contracts can't be enforced
AFAIK there's no unfairness provisions in common law. There are two statutes about unfair clauses - UCTA (Unfair Contract Terms Act 1977) and UTCCR (Unfair Terms in Consumer Contracts Regulations 1999, the UK implementation of an EU directive). Both are mainly focused on limiting businesses trying to enforce unfair terms on consumers. UCTA limits itself to specific types terms (liability limitations etc). UTCCR is much wider in the types of terms it covers, but still only applies to 'standard form' contracts (ie not-individually-negotiated terms), and only to terms which are unfair "to the detriment of the consumer".
Ie none of them will help a bank trying to claim that one of its own standard form contracts were unfair to the bank!
Edit:
If you just meant that that the existence of this sort of legislation undermines my 'certainty of contracts' point, I disagree.
For one thing, even the more-powerful UTCCR explicitly bans the core terms of the contract (ie how much it costs and what you're getting for your money) from being considered 'unfair' -- it doesn't try to judge whether a bargain is good or bad.
For another, there's a hell of a difference between the law choosing not to enforce a term in a standard form against a consumer who probably didn't read and certainly couldn't have negotiated it, and someone objecting to a term they did write/negotiate - i.e. either an individually negotiated term or, as here, a bank objecting to a standard form term it wrote itself.
Beneficial to whom? I won't pretend to know anything about the UK, but in those places I've lived, any time the law gets "complicated", it's because someone wealthy has an interest in it being so.
Would you mind having a read of, say, UTCCR[0] and let me know what wealthy interests you believe it serves? Here's the text: http://www.legislation.gov.uk/uksi/1999/2083/made . As far as I can tell its effect is to tilt the balance strictly in favour of the consumer, but I'd be interested if you see something I don't.
I hesitate to comment on another nation's laws, because if it works for them I'm glad (motes and beams, etc.), but ISTM "shall not be binding upon the consumer" understates a great deal of legal procedure, nearly all of which would be increased business for the tort bar. (Which, again, may be less of a problem for other nations than it is for us.) If 100 consumers feel a contract term is unfair and so decline to meet their obligations, the firm will file a suit against e.g. the 20 least likely ones to contest rather than settle, which is good for the firm's attorneys (or is it barristers?). Etc. Eventually a consumer will contest the suit under the provisions of this law. That will entail more court business.
In anticipation of this rigmarole, this law was probably a great one-time boost for those who rewrite contracts for purposes of risk-management. It certainly wasn't welcomed by small shopkeepers who enter into relatively simple contracts with their customers (e.g. to purchase an expensive item on terms). To compensate, such firms might have told their customers "the new law means it doesn't matter what's on the contract". Although untrue, that statement would be plausible enough to generate more sales, at least until consumers heard enough stories about court cases that they no longer believed it. Certainly there are consumers who have been helped by this law, but there are probably others who have been disappointed by it.
As the article mentions things like insurance and long term investments, annuities, stock certificates, and the like, are the ones where it makes the most sense to be the most exacting in enforcing contract terms. That's essentially the nature of the business, and in a world where people can hedge two massive sums of money against each other for hundredths of a percent gains and so on, it does make sense for the financial system to decide that this level of precision should be considered inviolate.
There is precedent for the argument that very long term arrangements (sometimes called "Methuselah Trusts"[0]) involving compounding interest should be prohibited or changeable in some circumstances but the lifetime of a single person would really never fall into that category.
Also of note in this specific instance, the "error" on the banks part is not a case of overlooked fine print, obliviousness to an extreme edge case situation that seems highly implausible, or a customer acting in somewhat bad faith or wastefully, which you could argue gifting first class tickets to random strangers is.
In this instance the whole point of the investment was to allow wealthy purchasers to make backward looking adjustments to a held investment portfolio. Which is, in fact, exactly what has happened.
Rich guy gets deal only offered to the rich that allows them to go from merely rich to extravagantly rich while contributing nothing to society. And it happens to be legal!
If we were talking about a Wall Street financial predator, people would be squealing for change. In fact, they have been. But this guy seems to get a pass for "sticking it to the man" or something.
My understanding is that Aviva provides life insurance and pensions to millions of people. If they were to go under, many non-rich people would suffer greatly. Just so this one already rich guy could further "stick it to the man."
Contrary to popular belief, this is true about many rich people. Rich people, in general, are not sitting on piles of cash or extremely liquid assets that could simply be "taken" from them with no impact on anyone else. Taking away businesses, taking away capital, taking away their ability to capitalize on the human networks they've formed in some industry turns out to hurt the body politic as well. It's why none of the large-scale efforts to confiscate wealth that have happened in the real world (most recently Venezuela for one example) ever seem to be going so well five or ten years later, once the first party has ended... removing capital from the people who know how to utilize it is not exactly a great deal for society.
Yes, "rich" people can get there "unfairly", but it turns out "just take it from them" is really a stupid idea.
So as to not fit too clearly into a "capitalist" mold, note this line of argumentation argues that such rich people shouldn't be able to simply pass this wealth down to their children, unless perhaps their children demonstrate similar facility with using it to their and society's mutual benefit. (Legalizing that would be tricky as well, but at least conceptually it could be argued.)
> Yes, "rich" people can get there "unfairly", but it turns out "just take it from them" is really a stupid idea.
Who said "just take it from him?" I certainly didn't. I don't know the complexities of the case, the law, etc.
I'm just surprised people rally around this guy like he's a common man sticking it to those rich plutocrats. When, in fact, it kind of sounds like the exact opposite.
Also: He doesn't have "it." If anything, the argument would be that he should be prevented from creating an economic disaster just so he can jump from "pretty damn wealthy" to "unbelievably wealthy."
I am not sure which is worse - the stupidity of AA for selling these tickets or their pathetic attempts to get out of the contract when they realised they were idiots.
> "...the stupidity of AA for selling these tickets..."
From the article:
"Each had paid American more than $350,000 for an unlimited AAirpass and a companion ticket that allowed them to take someone along on their adventures. ...
[T]he marquee item was the lifetime unlimited AAirpass, which started at $250,000. ... For an extra $150,000, they could buy a companion pass. Older fliers got discounts based on their age.
When American introduced the AAirpass in 1981, it saw a chance to raise millions of dollars for expansion at a time of record-high interest rates."
From Wolfram Alpha:
$400000 (1981 US dollars) in 2015
equals:
$1.059 million (2015 US dollars)
(based on Consumer Price Index)
These individuals each gave American Airlines more than a million dollars for expansion during a time when it was really hard to get money from banks. In exchange for their investment, they got a lifetime, unlimited travel ticket for two. (Notice that older investors were permitted to invest LESS to get the same benefits, in recognition that an older person would realize less benefit from the compensation.)
AA was looking for non-traditional investors. I think that unlimited air travel for two for the rest of the investor's life is a reasonable alternative to a cut of the company's profits for a one-million dollar outlay, don't you?
It looks like before the bankruptcy, they traded on the NYSE under the LCC symbol [0]. However, I too am having difficulty finding historical stock data. I might stop by the library to ask a librarian later today. :)
1) This is a tragically short-sighted way to look at the cost of these tickets. You cannot look at the retail price of the service; you must look at its actual cost.
2) What is a better compensation for a one-million-dollar investor to whom you don't wish to give a share of the company?
In the end even AA came to the conclusion that these tickets were sold far too cheap.
As I have posted already I don't cut AA much slack because of what they did to me, but the essence of stupidity is selling something far below its true value because you did not consider how others might use it.
AA put me on the SSSS list. I am not on this list with any other airline so I blame them. Maybe they were following some sort of stupid rule imposed by someone else, but if so why only AA.
More complicated because of the way first class travel works. Somewhere between* 10% and 50% of (domestic) first class seats are filled by paying passengers. So the other 90% - 50% are either empty, or filled with elite flyers who paid for an economy ticket and got upgraded.
So in almost every flight, the real cost to AA is the cost of having a golden ticket passenger filling a 1st class seat, vs. having either an empty seat or elite upgrade passenger filling that seat.
In either case, the actual cost to the airline is far far less than the actual cost of a 1st class ticket.
No, but the tickets were worth far more than what AA sold them for. The best guess of what they were really worth is their last attempt to sell them when nobody was willing to pay the price.
> No, but the tickets were worth far more than what AA sold them for.
This is short-sighted.
There's opportunity cost to be considered. AAL needed money at the time they were granting the tickets to investors. The way to figure out the total benefit of the tickets to AAL is to consider what would have happened if AAL had not used the tickets as investor compensation and had instead:
1) gotten the same amount of money from regular banks
2) entirely gone without the money
This is neither an easy analysis nor a straightforward one.
I would also expect the penny-pinchers of a in-danger-of-failing company to forgo such an analysis, and instead play the "These lifetime tickets granted as investor compensation are costing us too much! We have no choice but to renege!" card.
Bearing in mind that the tickets were sold on an ad hoc basis over the course of more than a decade, and each individual pass sale represented a negligible sum compared with American's running costs, I suspect (2) was a surprisingly attractive option. When airlines actually need to raise funds, they borrow big, and have plenty of high value assets to secure lending against, and plenty of scope to refinance when interest rates come down.
It's pretty difficult to view this as a smart fundraising strategy as opposed to a questionable promotion with ridiculously loose terms.
But ultimately neither the odd $xxx,xxx in revenue from a frequent flier nor the implied $xxx,xxx per annum foregone from the promotion's biggest abusers are likely to have made a great deal of difference to AAL.
The logic in your comment seems sound. However -according to the article in the OP- when this program was first created bank loans had very high interest rates. I can't verify the truth of this statement, so I have to take it on face value.
Also, don't forget that the low end of the lifetime unlimited flights program cost between $600k and $700k, and the high end (flights for two) cost a little more than one million USD in inflation-adjusted dollars.
To speak to your first two paragraphs:
It could be argued that AA could have discontinued the program in the 1990's or so... maybe they should have, I have no idea. But that would not have freed them from their existing obligations.
To speak to your third paragraph:
AA is being rather dishonest when they use the retail price of services to demonstrate the impact of this program. They really have to quote the actual cost, which -I'm sure- can be difficult to determine.
If one is attempting to stir up sentiment for one's decision to renege on a lifetime contract, I suspect that one would want to do as little honest analysis as possible. :P
These are not unlike other open ended packages where the seller expects to come out ahead, on average. Slightly further afield, it reminds me of yesterday's thread on reedit. They revoked their unlimited free speech policy, so that they could stop hosting some really nasty stuff.
Some people said "but you promised unlimited free speech forever."
I don't know if there is a clean judgement you can make. promises should be made in good faith and kept. If a company makes promises that it can't keep, then what. Sometimes you hit a sort of promise bankruptcy.
I think that's the case here.
On a complete tangent… The owners of these passes are probably an interesting bunch. (A) I think their brains are wired for quirky beat the system thinking. (B) You have to have a mind for opportunistic life hacks, in order to jump on this.
Yes I was rather harsh [1]. The honourable thing for AA to have done would have been to buy back the tickets at their current value, not try and find a way to weasel out.
1. I am biased as I have hated AA ever since they decided to put me on some secret list (the SSSS list) for no reason which means anytime I flew AA I would be put through the wringer.
Edit. For those interested here is the details about the ssss list [2]. I am not sure what my "crime" was, but I suspect it was because I often flew one way (around the world tickets). The crazy thing is it is airline specific as I am not on the list with any other airline.
> I have hated AA ever since they decided to put me on some secret list (the SSSS list)
Can you prove that AAL did this? If you can't, then this is absolutely not the fault of AAL. This is the fault of DHS or TSA.
Peruse the various air travel articles on the papersplease.org blog for more info. (I wish I could give you good search terms, but some recent relevant articles don't contain the term "SSSS". Maybe try "Secondary Screening"?
How could I possibly prove AA put me on this list? All I can say is only AA has me on this list, so this would suggest AA put me on their own SSSS list. It means that when I fly I actively avoid AA if at all possible. I haven’t flown with AA for around 5 years so I don’t know if I am still on the list, but I am not on it with any other airline.
The worst episode I had was when the TSA forgot to mark off my boarding pass after I went through security. At the boarding gate the AA staff freaked out, called security, and in front of the other passengers I was dragged out of the airport and back through security. I was then left with running through the airport to catch my flight. I just managed to get back to the gate before the plane left.
It makes some sense to offer open ended packages, but not when the value of the open ended packages is far too high for anyone to consider buying it if they didn't expect to significantly overuse it. And $250k really isn't that much money in terms of first class tickets, or in the scope of an airline's cost base.
I suspect the owners of the passes were more characterised by having the sort of occupations where they could effortlessly stump up free cash, and a lot of time or requirement to travel, and probably a fondness for first class too. Most people with a mind for opportunistic life hacks don't have $250k to invest in future airline tickets.
> If a company makes promises that it can't keep, then what.
If the company is allowed to break the promise, then it benefits at the cost of trust. Not merely trust in the company, but trust in general. This ends up being a cost on all other entities (actual or legal) who will ever depend on trust. In short, it is a form of theft.
I'd imagine you're always free to leave, in a legal sense, at the cost of missing your flight. The airline's ability to deny boarding gives you a strong incentive to cooperate.
Back in 1981, 30 year treasuries were yielding 14% (http://www.nytimes.com/1981/08/08/business/treasury-bill-rat...) So you really need to figure out what the total cost of borrowing millions at 20% interest is compared to the cost of goods sold for flights.
The other key factor is the marketing value. AA sold these tickets for years, presumably they had some sort of value, perhaps as an incentive for point junkies to aspire to?
AA sold these tickets for a long time after interest rates came down. They didn’t even both to prohibit people from selling their companion tickets to others, or making multiple booking that could be cancelled at the last minute. This was not a well thought out idea.
Even if it was a good idea, the way they went around trying to break their own contract was not very good. The best way to handle something like this is recognise you made a mistake and buy back the tickets from their owners at their current market value.
Similar things happened to hosting companies that sold "lifetime" hosting, though at least in that case it would have been possible to bound future costs per unit time (and thus cover it with an annuity or equivalent). But in this case, the cost was entirely unbounded.
What were they even thinking? How could that have ended well in any way? I wonder if there's more to that than the Wikipedia article tells (like a disgruntled exec who wanted to take the company down with him before he left or something).
How does Hoover apparently not have anyone who understands the concept of Total Cost of Ownership? If there's a cheaper TCO that involves having a vacuum cleaner, then people are going to buy the vacuum cleaner and throw it away!
Paying for usage appeals to nerds but most people don't know how much of the service they do/will use and have been burned by overage fees. They prefer to pay for the service that fits their need (talk to your family for as long as you want) rather than a utility (pay 2¢ a minute) even if the utility would turn out to be cheaper in the long run. We know that, we sell on the benefit, right?
Especially that the prices should fluctuate if you were to pay for what you use. A taxi at night is already more expensive, and electric energy is sometimes cheaper but this should apply smoothly (but not necessarily predictably) to nearly every service: surge pricing everywhere and forever.
The added cognitive burden and transaction costs simply aren't worth it a lot of the time so you get various all inclusive offers instead that have to favour some outliers.
With any "all you can eat" scenario - especially high valued ones, it may be best to cap the number of participants so you can at least observe their behavior and cap your risk. It would also help with price discovery so you can truly calculate the value you are offering and price accordingly.
What else is a proper compensation to a (inflation-adjusted) 1 million dollar investor to whom you don't want to grant a share of the company?
Edit: To the downvoters: This is a serious question, not snark. Folks are claiming that these tickets were a stupid idea. If you read the article, you discover that these tickets were compensation to million-dollar investors. AA needed that money. They had to give something to get it. If they were to give something other than those tickets, what should it have been?
Remember that someone who has a million dollars laying around will expect that they get more than a million dollars out of their investment. That's generally how investment works.
I am voting you up since you are asking a serious question. The tickets were underpriced for what they offered. What AA should have done is auction off the tickets and let the market decide what they were worth.
It doesn't sound like they sold tons of tickets (e.g., demand wasn't that high), so unless they severely capped the number of tickets (which they probably should have done anyway), an auction wouldn't have yielded very different numbers.
The fact they increased the ticket prices a lot over the years suggests that the early tickets were very underpriced. When you sell something totally new and potentially open ended then it is always wise to get as much validation as possible from the market before setting the price.
I didn't say they were underpriced. An auction doesn't solve for accurate price without significant demand, which they didn't have. (The Hoover example elsewhere in this thread is counterfactual example.)
Note also that even though AA estimated that the passes (for certain individuals) "were costing it millions of dollars in revenue", no one bought one for $3M in 2004. The value of an unlimited pass is directly tied to how much you'd use it. A handful of individuals were at the far end of the bell curve.
A Dutch auction [1] would be the way I would auction of these passes. This way you find out the top price that the people on the far end of the bell curve think the pass is worth.
Dutch auctions work with one item (or multiple items where a single buyer would want n items of a limited supply: see eBay). That still wouldn't solve the problem in this case: remember, they didn't run out of passes. They sold every one they could at the offering price. Where there are multiple buyers, no rational buyer is going to look to pay a premium.
And? What's your point?
I've found this story interesting, it shows that each time there is a possibility to exploit an opportunity like that it will be exploited, the greed and lack of consideration for other people will prevail.
Imagine a reverse situation: a man buys this lifetime ticket and dies in a car accident a month later.
Do you think the company would return the money to the grieving relatives or they would exploit this opportunity with typical greed and lack of consideration for other people and keep the money?
I found the headline interesting and then on following the link realized I'd read it already. So it would have been nice to have a (2012) so I could've realized it was a repeat sooner.
It is a repost, though. I've seen this posted before various places over the years. I'm not really interested in old content I've read multiple times before.
"When he was seven years old, Max-Hervé George was given a magic ticket by his father. It lets him turn back the clock, to invest with perfect hindsight week after week, steadily accumulating a fortune.
The ticket is a life insurance contract and Mr George, now 25, has fought for years in the French courts to preserve its magic. He could be a billionaire by the end of this decade and, by the end of the next, his contract would be worth more than the insurance company which stands behind it, Aviva France.
There is no mystery to the financial magic, however. Instead it is a story of grand stupidity, of how a French insurer wrote the worst contract in the world and sold it to thousands of clients.
The company was L’Abeille Vie. In 1987 it began to offer a special deal to its richer clients, a Fixed Price Arbitrage Life Insurance Contract.
Life insurance is a popular savings product in France, and typically the customer allocates their money among different investment funds offered by the insurer. But this contract was not typical: prices for the funds were published each Friday, and clients were allowed to switch funds at those prices anytime before the next price was published, even if markets moved in the meantime.
L’Abeille Vie called this an arbitrage, but really it was a gift. Is the stock market up this week? Just call your broker to buy it at last week’s price and pocket the difference." ...