All they (Perry’s administration) had to do was convince retirees to let UBS buy life insurance policies on them. When the retirees died, those policies would pay out benefits to Wall Street speculators, and the state, supposedly, would get paid for arranging the bets. The families of the deceased former teachers would get nothing.
By Jason Cherkis and Zach Carter
WASHINGTON — Two weeks before Thanksgiving in 2003, top officials from Texas Governor Rick Perry’s office pitched an unusual offer to the state’s retired teachers: Let’s get into the death business.
Perry’s budget director, Mike Morrissey, laid out a pitch that was both ambitious and risky, according to notes summarizing the meeting provided to The Huffington Post.
According to the notes, which were authenticated by a meeting participant, the Perry administration wanted to help Wall Street investors gamble on how long retired Texas teachers would live. Perry was promising the state big money in exchange for helping Swiss banking giant UBS set up a business of teacher death speculation.
All they had to do was convince retirees to let UBS buy life insurance policies on them. When the retirees died, those policies would pay out benefits to Wall Street speculators, and the state, supposedly, would get paid for arranging the bets. The families of the deceased former teachers would get nothing.
The meeting notes offer the most direct evidence that the Perry administration was not only intimately involved with the insurance scheme, but a leading driver of the plan.
It was a back-room deal at odds with Perry’s public persona as a career politician who had successfully sold Texans on his vision of minimal government intrusion. And it still is. Nearly eight years after the meeting, when Perry formally announced his run for the presidency in Charleston, S.C., he honed that vision into the perfect applause line: “I’ll promise you this,” he had said in his West Texas drawl. “I’ll work every day to try to make Washington, D.C. as inconsequential in your life as I can.”
Death in Texas, on the other hand, is another matter. That first meeting with teacher groups and retirement plan officials in November 2003, recalled one attendee, was an effort by Perry’s office to solicit support for the life insurance idea from teacher associations. There was little question who was promoting the plan.
“His office was pushing it,” the source said. “It was like, ‘We’ve got to do whatever we can. … Here’s an innovative idea. We really want you on board.'”
The governor’s office was even prepared to put down a little cash up front. If retirees balked at the notion of the state profiting from their deaths, Perry’s budget men suggested they could be persuaded for the cost of a pair of shoes, according to the meeting notes. If a retiree signed a contract allowing the state’s teacher pension fund to buy life insurance on them, the governor was prepared to give them between $50 and $100.
“Precious little for what they were giving up,” said the meeting attendee.
The notes make clear that the governor’s proposal deliberately targeted the elderly. The state was only seeking to take out life insurance on people between the ages of 75 and 90. At a separate meeting five days later, the plan’s proponents discussed the “mental capacity” of these retirees to grant consent as one of three major technical obstacles to the plan, according to notes from that meeting.
At the first meeting, Morrissey said it could take 10 to 12 years for Texas to “earn” money from the scheme, but insisted the deal could be worth up to $700 million for the state if the retirement fund could sign up 40,000 retired teachers.
The meeting notes show Insurance Commissioner Jose Montemayor, a Perry appointee, joined Morrissey in the sales pitch, claiming that “this arrangement” was already being utilized by “some very rich people” who had set up similar plans to benefit the University of Texas and Texas A&M.
“It was a pretty hard sell: ‘This is something you need to get on board with,'” the source said, paraphrasing officials’ comments at the meeting.
The source says the claim involving a similar program benefiting the Texas universities turned out to be untrue — the “rich people” had taken out the policies themselves with the intent of sharing any life insurance payments with the universities. Montemayor, as insurance commissioner, would have had to waive “insurable interest” regulations to allow the schools to buy life insurance on their professors. There is no public record that he did so. The University of Texas and Texas A&M did not return requests for comment.
The aggressive push from the Perry administration differs remarkably from its later public characterization of its involvement in the deal. When the proposal leaked to the press that winter, the governor’s spokespeople attempted to tamp down any notion that Perry was the engine behind the plan — and said if there ever was a plan, it was nowhere near final.
That December, spokesman Gene Acuna told the Dallas Morning News that the plan was merely “a concept.” “Questions are being answered, questions are being raised,” he said. “Depending on the answers to those questions, plus input from all affected parties … that will determine the next step.”
In a January story in the Fort Worth Star-Telegram, another Perry spokesman attempted to create more distance between the governor and the plan. “We never endorsed any concept,” said Robert Black. “The governor’s opinion is that it’s prudent to look at ideas and concepts … particularly when it won’t result in a loss of benefits or raising taxes to shore up the retirement system.”
Messages left for Perry spokespeople requesting comment for this story were not returned. But the behind-the scenes meeting notes reveal Perry’s office had not only endorsed the concept, but had already formulated a plan to implement it. That first meeting on Nov. 12 was run by Perry’s staff. The man who would become the fall guy for the controversy — former senator-turned-financier Phil Gramm — was not even present.
THE GRAMM BARGAIN
Gramm had made six-figure campaign contributions to Perry’s campaign and had been — and may still be — one of Perry’s most trusted political allies and personal mentors. “Perry worships at [Gramm’s] feet, intellectually,” said one semi-retired political consultant in Austin. “He considers Gramm an economic genius.”
After lending political aid to Perry, Gramm was poised to make a fortune from the life insurance deal. His role in the scheme had the appearance of banal corruption and cronyism. Although Gramm wasn’t in on the first meeting with teacher groups, he played an active role in subsequent efforts to push the scheme.
It was Gramm who could make the plan a financial reality. He left the U.S. Senate in November 2002 for a lucrative vice president post at UBS. After Morrissey, Montemayor and Perry budget aide Brian Guthrie first articulated the plan on Nov. 12, Gramm came to Austin to help push the deal. That move eventually prompted Texas Democrats to file an ethics complaint against Gramm for making a the pitch without registering as a lobbyist.
Gramm was hoping to put together a new package of complex assets for speculators to gamble on. Corporations had been using mass purchases of life insurance policies on their employees for years as part of an elaborate tax avoidance scheme (the government doesn’t tax insurance premiums or death benefits). The employees themselves — affectionately referred to as “dead peasants” among insurance experts — received no benefit. Only the companies who bought the policies would receive payouts when these “peasants” died. Gramm wanted to convince investors to bet on peoples’ lives by purchasing pools of life insurance and annuities taken out on individuals.
Gramm and UBS had concocted a gruesome combination of what are now regarded as two of the most infamous Wall Street scams on record. The resulting package closely resembled the growing market for mortgage-backed securities, but instead of allowing Wall Street to bet on peoples’ homes, it would enable bets on peoples’ lives.
State laws generally frowned on big Wall Street investment banks taking out life insurance on random individuals. To buy life insurance on another person, the insuree’s written consent was necessary, as was the cooperation of a state insurance regulator willing to work around requirements that the owner of an insurance policy have an “insurable interest” in whatever — or whomever — was being insured.
Enter the Texas Teachers Retirement System (TRS), the state-operated pension fund with a tremendous database full of soon-to-be-deceased retirees who could sign off on policies for the UBS scheme. At the meeting with Gramm, then-State Insurance Commissioner Jose Montemayor was happy to bend the law. He agreed to grant a special waiver on insurance regulations that would allow the deal to go through, according to meeting notes.
“There was some worry about the legality,” recalled the attendee. “[Montemayor] said ‘Don’t worry about it.’ He could take those questions off the table as the insurance commissioner.”
“I don’t remember any of the details,” Montemayor told HuffPost in a recent interview. He is now a principal with the Black Diamond Capital Partners private equity firm.
When asked about the scheme, TRS insisted that it was only tangentially involved in the UBS discussions.
“While TRS attended a few meetings to learn what the proposal was about, the concept was never fully developed and was never taken to the TRS Board for action,” TRS spokesman Howard Goldman told HuffPost. The current executive director of TRS is Brian Guthrie — one of the two Perry budget officials who presented the deal back in 2003.
The plan was to have UBS buy the life insurance policies with mega-insurer AIG, then bundle those policies into securities, and sell them off to a small group of investors. By keeping the investor group small, Gramm could avoid the public and regulatory scrutiny required by standard public securities sales. He wouldn’t even have to disclose details of the scheme to the Securities and Exchange Commission.
Texas would get a portion of the fees UBS received from selling the securities. But while Gramm’s pitch included far more structural details than Morrissey’s previous talk, it came up shorter on one crucial piece of information: how much money the state would actually make.
Morrissey had described a payout of up to $700 million. But Gramm refused to offer even general revenue figures. In one ghoulish section from the meeting notes, Gramm emphasized that the actual payments to the state would depend on who died, and when.
“These amounts depend on interest rates and deaths,” the notes read. “They can’t price it yet, or estimate the amount of money available annually to TRS until the bank looks at the universe of those participating.”
None of the state’s money would be at risk in the initial purchase of life insurance plans, but the state’s potential liabilities got murkier when those plans were bundled into securities. In order to profit from those security sales, Texas would have had to partner with UBS. And if investors ultimately thought they’d been bilked in the arrangement, Texas could be sued. It was also not clear how the state would form a partnership with UBS, or how much it would cost.
“It was real nebulous,” said a person present at the meeting. “It was kind of like, ‘Trust us, we’re big boys who play in this league and we’re going to protect you.'”
Regardless of how any ultimate deal eventually panned out, Gramm and UBS would score big, up-front commissions just for getting the contracts signed. Phone calls and emails to Gramm requesting comment for this article were not returned. UBS likewise did not respond to requests for comment.
The strange thing about all the scheming was that the teacher pension fund didn’t actually need any money. At the time, it had a funding ratio of over 94 percent, well above the 80 percent threshold that financial experts consider healthy. Perry’s team needed to convince the public the scheme’s architects were the white knight riding in to save their retirements; meeting notes show plans to persuade retirees that they would be doing a patriotic deed by allowing investors to gamble on their deaths.
Jeri Stone, the Texas Classroom Teachers Association‘s executive director and general counsel, told HuffPost that the plan had nothing to do with shoring up any retiree safety net; it was simply an example of Perry’s deference to Gramm. Without the former senator’s involvement, she said, the plan might not have gotten an audience.
Since the pension fund was healthy, the deal was instead structured to profit TRS-Care, a health care program for retired teachers administered by pension fund officials. TRS-Care had initially been established in 1985 with 10 years of funding, receiving additional funding injections in following years to keep it afloat.
When the deal eventually leaked, teacher groups balked at the entire arrangement.
“It was just pretty morbid and I don’t think it convinced anybody it was gonna enrich anybody except Phil Gramm and UBS,” Texas State Teachers Association Spokesman Clay Robison told HuffPost. “Our members were pretty much appalled by it.”
“No one wants to think there are people out there hoping you’ll die soon,” Stone explained.
During the November 2003 meeting, Gramm and the Perry administration were well aware of the potential for a media debacle. “The ‘liability’ is really on the PR side for AIG … and possibly TRS,” the meeting notes read. “They want to avoid a ‘Wal-Mart’ problem.”
Although hundreds of companies used dead peasant insurance policies to dodge taxes, Walmart took a particularly bad PR beating for the practice, in large part because the company was profiting from massive life insurance policies on rank-and-file workers whom it paid low wages. Perry had just signed off on cutting benefits to retired teacher health care plans, and following that up with a plan to gamble on retiree longevity had the potential for political and public relations trouble.
How to deal with the media was also a topic at the Gramm meeting, according to the notes.
“Gramm said that once the program is structured, the leadership and he will hold a press conference and go to editorial boards,” the notes state. If anyone asked tough questions, Gramm instructed they would give vague answers. The key: Do not explain what the plan would exactly entail — just tell the press that Texas was “using insurance products under the supervision of the insurance commission and Montemayor … to help fund or enhance TRS-Care.” If all else failed, officials were to tell the media that “this is a private offering.”
Gramm concluded the meeting, the notes show, by saying he wanted “to consummate this deal ASAP.”
When the press did find out about the scheme, Perry’s team was unable to simultaneously downplay its role in the endeavor and shape the public narrative about the program. Perry did not defend the plan in detail because doing so would have only reinforced the perception that Perry was, in fact, a major advocate of the plan who had been involved since its inception.
Democrats in the state legislature hammered Perry, decrying his relationship with Gramm as corrupt while highlighting the recent cuts to retiree benefits. Charles Soechting, the chair of the Texas Democratic Party at the time, led the charge.
“It was just real clear that it was a deal worked out between Perry’s people and Phil Gramm’s to help UBS make a lot of money,” he told HuffPost. “It was just a scam.”
The deal collapsed. But ultimately, none of its top architects paid a serious political price for the debacle. Perry did not abandon his close relationship with Gramm. A few years later, Perry’s 23-year-old son went to work for UBS, and Gramm began urging Perry to let UBS privatize the Texas state lottery. Perry named Guthrie executive director of the teacher pension fund. Morrissey is now a senior adviser to Perry. And Perry himself, of course, is now a top contender for the Republican presidential nomination.