Sinking the Global Economy: The Lloyds of London Story Part II

0:00This message is a paid partnership with AppleCard. There's something interesting about how seamlessly certain tools fit into daily life. Apple Card is one of those things. It can be applied for right in the wallet app on iPhone, and approval can happen in minutes. So it's ready to use immediately with Apple Pay. I'm so glad the days of finding my wallet, fishing out the credit card, using it, putting it back in my wallet, or oops, maybe I use cash, where's the ATM? Enough. The first time I used Apple Pay on my phone with my Apple Card, I was like, this is the future. There's no going back. With Apple Card, purchases earn daily cash up to 3 % with no points to track and no waiting for rewards.

0:45It's simply daily cash back that I earn on every purchase. There's even an option to open a high-yield savings account through Apple Card. And while I haven't done it yet, if I do, my daily cash can grow automatically over time without any extra effort. Because Apple Card lives in the Wallet app, it's always accessible on iPhone and can be used with Apple Pay at over 85 % of merchants in the U.S. And the security of Face ID and Touch ID prevents unauthorized purchases, whether using iPhone or Apple Watch. To explore it yourself, you can apply for AppleCard in the Wallet app on your iPhone. Subject to credit approval, savings is available to AppleCard owners subject to eligibility.

1:31Savings in AppleCard by Goldman Sachs Bank USA, Salt Lake City Branch, member FDIC, terms and more at AppleCard.com. Run a business and not thinking about podcasting? Think again. More Americans listen to podcasts than ad-supported streaming music from Spotify and Pandora. And as the number one podcaster, iHeart's twice as large as the next two combined. Learn how podcasting can help your business. Call 844-844-iHeart. 23-year-old Elizabeth Plunkett heads off for a night away with friends. It's the summer of 1976, the best summer we've had for years. Just hours later, she is kidnapped by two men in British Bay.

2:06These are two career criminals wanted for rape in Britain. They are Ireland's first serial killers. While both men confess to Elizabeth's murder, no one is ever convicted. How could this happen? We're being denied any sort of justice. Listen to Bad Women Presents Stolen Sister, wherever you get your podcasts.

2:30Pushkit. Too quick? No, it was perfect. Pushkit. Stop. You got it.

2:48Starting this one with a headline from The Onion. I'm surprised it's taken us this long to start with an Onion headline. It's supposedly from the day after the Titanic sank. And the headline is... World's largest metaphor hits iceberg. Always loved that one. It's good. It's good. And I thought of it when I was working on this show on part two of our story about Lloyd's of London. So I looked it up, and I didn't remember the subhead, which is also genius, which is, Titanic, representation of man's hubris, sinks in North Atlantic. I'm dredging up this bit of Gen X nostalgia, not just because I think it will be red meat for our listeners, though I do, but also because I think it is the perfect place to start the story of Lloyd's of London in the 20th century.

3:38because the Titanic sailed in April of 1912. It was insured by multiple Lloyd's underwriters. Of course it was. Of course it was. The insurance was cheap because the Titanic was unsinkable. And then, as we all know, the Titanic sank. And the insurers at Lloyd's paid up in full within 30 days. And yes, the Titanic is a metaphor for Lloyd's in the 20th century. Lloyd's was the finest insurance market on the seas, seemed unsinkable until it hit an iceberg. An iceberg made of hubris and lined with asbestos. Not a great metaphor. No, it's good. But I'm going down with the ship of my metaphor. I'm Jacob Goldstein.

4:24I'm Robert Smith. And this is Business History, a show about the history of business. And the history of insurance. We're starting with Lloyd's at the top of its game. It's the 1980s. And to be an underwriter at Lloyd's is to live the dream, at least to live the insurance underwriting dream. Remember, the underwriters don't work for Lloyd's. Lloyd's is a marketplace. They work at Lloyd's. They write insurance policies. They collect premiums. They pay claims. But at Lloyd's, they do it with style. There is this description of underwriters at Lloyd's from around this time that I love and that I want you to read.

5:02Many leading underwriters have presence. They wear a rose in their buttonhole, make an entrance fashionably late, shoot a couple inches of white poplin cuff displaying gold links, unscrew the top of a gold fountain pen, and scribble their initials with a stagey flourish. That scribble, by the way, that is the actual underwriting that has been going on at Lloyd's for about 300 years at this point. And that description comes from a book called Lloyd's A Reputation at Risk by Godfrey Hodgson, published in 1984. And I want you, Robert, to read just a little more of that passage about underwriters.

5:42There are plenty of these leading men at Lloyd's, even a few stars. Ian Posgate is the only superstar. They call him Goldfinger in the market. He positively seeks out dangerous business where his competitors are nervous because there have been heavy losses. War, hijacking, political upheaval, catastrophe have been his opportunities. Goldfinger. Goldfinger. Apparently got his start writing insurance on ships going up the Mekong during the Vietnam War. What I love about this is he does sit at a desk in a room in London, but he's so edgy because of the policies he writes that the other insurance agents are like, that guy?

6:28Goldfinger. I mean, he is also one of the highest paid men in England at this point. So, you know, yes. Because he uses his finger to sign a name which is worth its weight in gold. And so still at this point, Lloyd's is obviously not a coffeehouse anymore, but there is one room where Pazgate, Goldfinger, and the other underwriters work, and it's called The Room with a capital R because it's Lloyd's and they love to capitalize things. And I should say just structurally at this point that underwriters aren't like loan guns anymore. You know, it's not just like some guy. There are these companies called managing agents that are kind of doing the insurance business.

7:07But star underwriters are still stars. And you can think of The Room as like kind of like a farmer's market, you know, or like a food market you might visit where there's, you know, different stalls and somebody selling vegetables and somebody selling chicken at one or whatever. Goat cheese guy in the corner. Yeah, there's a goat cheese guy in the corner. But instead of that, it's like there's a guy in this box selling kidnapping insurance and there's a guy in this box selling marine insurance and whatever. And they still have the lutein bell that we talked about last time, that bell that got dredged up.

7:39That's still in the middle of the room, mostly ceremonial at this point. And still, each underwriter has, you know, a little stall, a bench, a phone. Computers are just starting to get there in the 80s. and the brokers, the people who were there to buy insurance, still go from box to box, just like they used to go from table to table hundreds of years earlier, talking to different underwriters looking for insurance. And in that book you were reading from, there is this amazing scene where the writer describes just a few hours one day at Posgate's box, at Goldfinger's, you know, box in the room.

8:15I can imagine, you know, when you have a policy, something so strange, so dangerous. You present it to someone in the room, and he just points over. Goldfinger. So here's a list. It is amazingly heterogeneous, varied. The people are looking for insurance on a Swedish cargo ship, a mansion in London owned by an investment firm in Zurich, part of the risk on an oil drilling platform in the North Sea, a policy covering a construction company against the risk of confiscation and expropriation of their plant in Indonesia. Race horses in Tennessee. It's almost starting to seem a little dodgy, some of these things they're insuring.

8:57Shell companies are involved. Well, I will say it came out later that Posgate himself was at least somewhat corrupt. He was tried for fraud after millions of dollars in premiums that he was responsible for disappeared. He was acquitted. But he did admit to accepting a Pizarro painting in some kind of shady deal. And he was pushed out of Lloyd's. And so that really was Lloyd's by the 1980s. Insidery, corrupt, but also still glamorous, weirdly glamorous for insurance. Well, you may remember in the 1980s, like, Lloyd's was one of those jokes that everyone could make. You know, if you were good at, say, talking on the radio, you would joke, oh, well, Lloyd's has insured my dulcet tones.

9:42And everyone would laugh because it was both a joke, but it was also a huge status thing to be insured by Lloyds as you were at the top of your game. Yes. Lloyds, in fact, insured Bruce Springsteen's voice and they insured racehorses and they insured satellites. They actually paid for the first ever satellite salvage mission in 1984. They'd been paying for ship salvage missions for hundreds of years. Yeah, I love that a satellite is the modern day ship, but of course it is. It is a space ship. So, in fact, in the 80s, Lloyds paid for astronauts on the space shuttle to go collect a couple satellites that Lloyds had insured and that, like, didn't make it to the correct orbit.

10:23And, in fact, when the astronauts came back, President Reagan gave the astronauts medals that Lloyds had paid to print up. Incredible publicity. I'd say you can't buy it, but Lloyds kind of did buy it. And there's a moment that I'm going to call the peak for Lloyds right in here. It's 1986 when Queen Elizabeth opened Lloyd's big new fancy headquarters. I love this picture of Queen Elizabeth, her technical title, by the grace of God of the United Kingdom of Great Britain and Northern Ireland and her of other realms and territories. Queen, head of the Commonwealth, defender of the faith with giant scissors cutting a cutting a big ribbon and being like, Lord, she's open.

11:04But one lesson that I think is emerging on the show is if a company opens a beautiful, fancy new building. Especially with the Queen, yes. Especially with the Queen. But I'm also thinking of the Sears Tower when Sears built the biggest tower in the world. Maybe it's the top. Let's talk about why. Lloyd's needed that new headquarters because they'd outgrown the old one. And that growth was part of this much bigger transformation in how Lloyd's worked. You know, we started with guys in a coffee shop, merchants agreeing to underwrite the risk of a ship captain who walked in. But, of course, that was hundreds of years earlier.

11:40The economy has totally transformed. It's become bigger and more complex. And so it just wasn't going to work to have, you know, underwriters being solo operators. So these managing agent companies emerged. And more importantly, the underwriters and the managing agents created syndicates, groups of people that started out small and got bigger and bigger over time. By the 80s, some syndicates had thousands of people who all agreed basically to back the underwriters' policy. So if there were profits and you were in the syndicate, you'd make money. And usually there were profits. But if there were losses, you were on the hook to share in the losses.

12:19These are just ordinary people. Ordinary people with money. Yeah, ordinary rich people. Not that ordinary rich, but not in the insurance business. And they become known as names. If you get in on this, you're known as a name. Of course, with a capital N. Capital N. And becoming a name at Lloyd's, capital N, was a big deal. You had to be rich. You had to get invited. And then you had to be accepted. Lloyd's wasn't like begging to take your money. And in fact, after you got invited, you had to go to Lloyd's, to London, to this special room in their headquarters called the Atom Room with the furniture from some 18th century country house.

12:57Capital A, capital R. Indeed. And in this room, a senior person from Lloyd's told you what you were signing up for by becoming a name. I assume you're sitting on leather. So much leather. You're sitting in leather. Here's what it meant. It meant you're putting up your capital, your stocks, your bonds as a guarantee so that the syndicate that you're joining can sell more insurance. And as a rich person, you can still keep your bonds and your stocks. You can still get the dividends and the interest off of those. But it's doing extra work, your money, because it's also backing up this other thing.

13:34Exactly. And when the syndicate makes a profit, as it usually does, you get to share in that profit. And the syndicates are structured in this way that is tax advantaged, which is a huge deal in England because the taxes were so high. Like in the 70s, the highest marginal rates in England were 98 percent. Ninety eight percent. It's like it's like why even go to work at 98 percent? Yes. Now, it seemed like free money, but there was a catch. There was a catch. Of course, if the syndicate you were joining lost money, you had to share in the losses. But the real catch is you weren't just on the hook for the capital you pledged.

14:21So you pledged whatever,£100 ,000. Fine. Your liability when you signed up to be a name was not limited to the money you put up. It was unlimited. We're used to talking about limited liability. This was unlimited liability. Limited liability, as in limited liability corporations. LLC. Yeah, Aaron & Sons Limited. Every corporation, every big publicly traded corporation is a limited liability corporation. It was an innovation a couple hundred years ago that said, oh, we can take investors. And sure, you can lose all your investment money, but we're not going to take your home and your car and your pool.

14:57It's limited. You have limited liability. That's what allowed commerce to boom, really. Right, because you can take a risk starting a company, getting investment. A measurable risk. You put$10 ,000 into Enron stock. Yeah. Enron goes bust. You lose that$10 ,000. But nobody calls you up and is like, oh, by the way, you got to sell your car and your house because Enron still owes money. That's unlimited liability. And at Lloyd's, that's what we're talking about. That's what we're talking about. And they liked it. They liked it because they thought it was this pure expression of the free market, a true risk.

15:32Yeah. And they also thought it kept them honest. You know, the underwriters often participated in their own syndicates, so they had their own unlimited liability. And if you're buying insurance, you should like this. The person selling me insurance is saying they will either pay my claim or sell their house, sell their car, sell everything they have to make good on it. It's funny, right? Everything Lloyd's does has two sides to it. It has the pure mathematics, and it has a little bit of the showiness, a little bit of the trust, a little bit of the brand. And this was another one that said the rich and powerful of Britain will give up everything they own for you, Mr.

16:12Satellite Owner, if something should go wrong. Yes. So things are going to go bad at Lloyd's. Yes. And when that happens, there is this key question, which is, to what extent did people really explain to the names what unlimited liability meant? And you hear different stories about that. There's one story of a guy at Lloyd's who would tell prospective names. Okay, here's what unlimited liability means. Take out your checkbook. People still have checkbooks. Write my name on there. Date it, sign it, and leave the amount blank. Now tear it out and give it to me. And he'd take it and he'd put it in his pocket and he'd say, Becoming a name means I can cash this check for any amount, anytime I need to.

16:54That's the version of like really telling them what I need. Yeah, that's scary. Yes. Lots of names had different experiences or remembered it differently. They said unlimited liability was presented more as a technicality. Sure, yes, it's technically there, but we have reinsurance. We have insurance that covers us, the insurer. So if anything goes bad, the reinsurance will cover it. It's nothing to worry about. One name said somebody from Lloyd's told him that unlimited liability was just a gin and tonic, which I don't exactly, exactly understand what that means when I get the vibe, but it's so English.

17:31Common in chill as a gin and tonic. Most British thing ever. And in fact, up until the 70s, the 1970s, being a name was extremely clubby. You know, it was a very high status thing. Lloyd's was a high-class, high-status institution. You had to be rich. You had to have a lot of liquid assets to pledge. But in the 70s, the underwriters at Lloyd's realized they needed more names in their syndicates so that they could keep growing. They needed to grow beyond the club. And so they lowered the wealth requirements. They made it easier to join. And they started sending out agents to recruit new names, not just in England, but around the world.

18:16one guy apparently drove a Rolls Royce around New Zealand and Australia, which has more of kind of a, like, sleazy, multi-level marketing vibe to me than, like, a high-class thing, but I guess it worked. You roll into the outback town of Alice Springs, and you're like, good day, mate. Would any of you like to have unlimited liability? There was another guy who, like, golfed his way through the Midwest and the United States. That feels more on brand, you know. them. And these new names do still have to fly to London and go to that fancy room and, you know, hear the talk. And they do. And in the meantime, famous people do keep signing up.

18:56Camilla Parker Bowles, who today is the queen consort of England. Charles Schwab. Schwab the guy, not Schwab the brokerage. Was a name. Was a name. He was indeed. A couple guys from Pink Floyd. By the way, which one's pink. But also, also now, names are ordinary people who are not famous names. You know, they're doctors and accountants. And I'm sure there were some dentists. There's always some dentists. You talked about giant buildings as the sign of the top of any industry. But I think this is the moment that shows the most risk when you know that something works and you're like, well, let's let a few dentists in, you know, a few air conditioning repair company owners in.

19:36This is the moment at which you're taking more risk, bringing more people onto the line. And I mean, what that makes me think of is what's happening right now with private equity and like normal people retirement accounts. I'm not this is not investment advice. I don't have a view. But this is that moment for private equity right today. So this recruiting policy works. And between the early 70s and the late 80s, the number of names, capital N, goes from 7000 to more than 30 ,000. And for most of the time, being a name is in fact great. You get the tax benefits, you get steady profits, you get to say you're a name, you get to watch the queen open your new office.

20:15And then around 1990, after 300 years of Lloyd's glory, things get gory.

20:39This message is a paid partnership with Apple Card. There's something interesting about how seamlessly certain tools fit into daily life. Apple Card is one of those things. It can be applied for right in the wallet app on iPhone, and approval can happen in minutes. So it's ready to use immediately with Apple Pay. I'm so glad the days of finding my wallet, fishing out the credit card, using it, putting it back in my wallet, or oops, maybe I use cash, where's the ATM? Enough. The first time I used Apple Pay on my phone with my Apple Card, I was like, this is the future, there's no going back. With Apple Card, purchases earn daily cash up to 3%, with no points to track and no waiting for rewards.

21:25It's simply daily cash back that I earn on every purchase. There's even an option to open a high-yield savings account through Apple Card. And while I haven't done it yet, if I do, my daily cash can grow automatically over time without any extra effort. Because Apple Card lives in the Wallet app, it's always accessible on iPhone and can be used with Apple Pay at over 85 % of merchants in the U.S. And the security of Face ID and Touch ID prevents unauthorized purchases, whether using iPhone or Apple Watch. To exploit yourself, you can apply for Apple Card in the Wallet app on your iPhone. Subject to credit approval, savings is available to Apple Card owners subject to eligibility.

22:11Savings in Apple Card by Goldman Sachs Bank USA, Salt Lake City Branch, member FDIC, terms and more at AppleCard.com. Run a business and not thinking about podcasting? Think again. More Americans listen to podcasts than ad-supported streaming music from Spotify and Pandora. And as the number one podcaster, iHeart's twice as large as the next two combined. So whatever your customers listen to, they'll hear your message. Plus, only iHeart can extend your message to audiences across broadcast radio. Think podcasting can help your business? Think iHeart. Streaming, radio, and podcasting. Let us show you at iHeartAdvertising.com.

22:47That's iHeartAdvertising.com 23-year-old Elizabeth Plunkett heads off for a night away with friends. It's the summer of 1976, the best summer we'd had for years. Just hours later, she is kidnapped by two men in British Bay. These are two career criminals wanted for rape in Britain. They are Ireland's first serial killers. While both men confess to Elizabeth's murder, no one is ever convicted. How could this happen? We're being denied any sort of justice. Listen to Bad Women Presents Stolen Sister. wherever you get your podcasts.

23:28We're back from the ads, and this is the moment when things are going to start going wrong at Lloyd's. And there's kind of a bunch of bad things that start happening at Lloyd's in the late 80s, but I think you can boil it down to two. Mainly. The first one is asbestos, the naturally occurring fiber that people have used for its flexible fireproof qualities for thousands of years. Didn't know until I wrote this show that it was naturally occurring. 100 % organic, as it says on the tin. That's right. Asbestos became wildly popular in the 20th century for things like insulation and building materials.

24:06So, Clement, it's in my basement. And when we had inspection done, they're like, yeah, there's a lot of asbestos here. just don't spend a lot of time down here. And it's still there? It's still there. They're like, do not touch it. Do not remove it. Don't do anything. Good to know. That's kind of shocking. No, it is ubiquitous. Certainly by the late 20th century, it was ubiquitous. And old buildings in New York, yeah. And it became clear over the decades of the 20th century that people who were exposed to asbestos for a prolonged period of time, typically at work because they worked with it, could develop cancer decades later as a result of their exposure.

24:38Hundreds of thousands of people wound up dying from asbestos exposure. Whole towns where asbestos was mined were contaminated. And in 1969, a former insulation installer named Clarence Burrell was dying of mesothelioma, this kind of cancer you get from asbestos exposure. And he sued a bunch of asbestos companies, arguing that they failed to disclose the risks associated with their products. He actually died before the case went to trial, but his widow continued the case and won. The jury awarded Burrell's widow damages of$79 ,436, a modest sum. But this was just the beginning. Asbestos was, you know, was everywhere by this point.

25:25Millions of people had worked with it. And over the course of the 70s and 80s, it snowballed, you know. First, it was a few cases, then hundreds, then thousands, then tens of thousands, these mass torts. And then school districts started suing asbestos companies because they had to pay all this money to remove the asbestos from their buildings. And bigger and bigger and bigger verdicts keep coming in. And you know who insured a lot of the companies that were on the hook to pay out? Lloyd's, the syndicates at Lloyd's. And we haven't really talked about this, but one of the ways that insurance works is insuring uncorrelated risks.