choff's Xanga

WSJ on Wine Pairings in Tasting Menus - An Unlucky Pairing

Thu, 04 Sep 2008 01:41:13 GMT

http://online.wsj.com/public/article/SB120425033688201845.html
February 29, 2008

We certainly didn't expect this, but today we offer a cautionary tale.

When we were much younger, tasting menus were a foreign concept -- literally, a foreign concept: To try one, we had to go to France. That has changed. Restaurants all over America now offer multicourse menus to showcase small dishes of chefs' creations. As the inevitable next step, many restaurants offer wine pairings, showcasing the sommeliers' abilities.

We have enjoyed and recommended these pairings. Even before the idea of wine-tasting pairings was codified, we told sommeliers we'd like them to pair a wine with each course, and we'd tell them to be bold because we loved all kinds of wine. This has led to some great experiences and eye-opening pairings. It's how we had a stunning late-harvest Swanson Sémillon at the French Laundry in Yountville, Calif., and an Elderton Command Shiraz at Charlie Trotter's in Chicago that made our socks roll up and down. It's why we were surprised at the success of Gary Farrell Pinot Noir paired with monkfish with red-wine sauce at La Toque in Rutherford, Calif., and roasted quail with asparagus with an off-dry Von Buhl German Riesling at Victoria & Albert's at Disney World in Orlando.

So we wondered: How have wine pairings with tasting menus evolved? To find out, we tried four of New York City's, and America's, best and most famous restaurants: Le Bernardin, Jean Georges, Daniel and Per Se.

We are back, poorer but wiser, and, to quote Gilda Radner on "Saturday Night Live": Never mind.

Our journey started at Le Bernardin, a temple of seafood. We ordered the top tasting menu and the additional wines with each course (there was a set menu of wine pairings). Very little went right. The sommelier didn't hear a word we said. No matter how much we tried to explain in a low-key way that we knew something about wines and would like to discuss them, she kept to her script, which told us little we didn't know. Each white wine was served in the same kind of glass, adding to the feeling of rote standardization. When we asked questions, we were assured by her and by a waiter that they would send over the head sommelier, Aldo Sohm, who last year was named "Best Sommelier in America" by the American Sommelier Association. Although he walked past our table several times, he never stopped.

The dishes and the wines came and went as a blur. Even though we were there at 6 p.m., not one of the seven wines we were served was poured from a full bottle, which wouldn't have been as noticeable if the wines had seemed pristine, but they didn't. John said one wine had "notes of Band-Aids." A painfully contrite Mr. Sohm said in a follow-up interview that it was "impossible" that the wines had not been freshly opened and that he is partial to that type of Riedel glass. He also said that when diners ask to speak to him, he enjoys talking with them.

Most important to us, the pairings themselves were uninspired. The trick of any great pairing is that it makes the food and the wine better than they would be on their own. In this case, we found that the wines, time after time, dulled the tastes of the delicious seafood dishes.

In less than two hours -- let's repeat that: in less than two hours -- we were gone. We had told our servers that this was our sole entertainment for the night. Dottie had added, "This is a rare night out without kids. We like taking our time." Nothing penetrated our servers' consciousness. We felt very much like we had been treated as hayseed tourists who ordered the tasting and wine-pairing menus only because we didn't know how to pronounce the names of any of the dishes or wines. While we always try to remain anonymous when researching a column, we have never succeeded so brilliantly: In this case, we were positively invisible.

We have saved this for last: The wine-pairing menu was $280 for the two of us. That's just for the wine. Mr. Sohm apologized, tried to assure us that our experience was "very unusual" and asked if there were any way to make it up to us. "I feel really, really bad right now," he said. "I totally understand what you're saying, and I'm very unhappy about it."

Jean Georges was a more-gratifying experience. The wines (once again, pre-chosen) were served in different kinds of glasses, which added to the sensual experience of the meal. Once again, we went early, and every one of the seven wines we had was poured from a freshly opened bottle. Jean Georges started us with a bubbly, which seems appropriate -- a lovely Laurent-Perrier 1999 -- but it sure would have been nice to have it with the amuse-bouche. It felt strange to eat before we'd had a sip of wine, and the amuse-bouche -- especially the mushroom on a piquant green sauce with a little piece of toasted black bread on top of it -- would have sung with it.

At all four restaurants, we were unable to spend even a minute relaxing over wine before the food started to come. The restaurants could argue that if we wanted to do that, we could have ordered a glass of wine or a cocktail, but should this be necessary when we're planning to drink six to eight different wines with dinner? We wish the first wine would have come right away, to enjoy with the amuse-bouche and, if necessary, the first course. And the gesture, which needn't have cost the restaurant very much (but we guess every penny counted, since only Per Se didn't charge for coffee) would have started the meal on a more-gracious, relaxed note.

Once again, we never did meet the head sommelier, Hristo Zisovski, or Kimberly Drake, his teammate, whom he said works the room in his absence. People ordering full bottles got the whole sommelier treatment, with lots of swirling and sniffing and discussion, but no one other than our waiter, who was professional and knowledgeable, dropped by our table. And our waiter also never really listened or grasped that we are passionate about wine and wanted to discuss the wines before us.

Here, finally, however, was the kind of risky pairing that makes these tasting menus worthwhile: spicy poached lobster with an Oregon Pinot Noir. It seems an unlikely combination, but they worked beautifully. Mr. Zisovski said of the lobster pairing, "We serve either a white Burgundy or Pinot Noir, depending on what we have opened. The dish has orange and tangerine and saffron, and the lobster has some sweetness." The pairing worked, he said, because of "the lighter notes of Pinot and the fruit from the New World-style" wine. We enjoyed this pairing so much that Dottie asked for another "splash" of the wine to have with the lobster she was still enjoying. The waiter almost grudgingly poured an ounce more, but didn't offer any to John, whose glass also was empty. The wine retails for $22.

Mr. Zisovski later apologized for us not meeting either him or Ms. Drake. "There are a couple of waiters who are quite knowledgeable about wine," he said, and, in any case, "if they feel that a table wants to talk about it, they come and get me right away." We only wish.

Daniel was another step up. The food-tasting menu offered two choices for each course, so we were able to have a different dish at each step and therefore try each wine with a different dish, which was very interesting. (Once again, it was a predetermined menu of wines.) The stemware was varied and interesting, and the wines had been chosen with care. In fact, for the first time, we tasted two wines that we'd want to rush out and buy: an Alsatian Gewürztraminer and a 2006 Austrian Sauvignon Blanc from Tement.

What's more, Philippe Marchal, the head sommelier, came to our table three times to pour wines and ask how we were enjoying them. To us, so much of the fun of eating out is talking about wine, so we were delighted to finally have that opportunity. The pours were quite small, more like a taste in a winery tasting room than anything close to a glass, but twice the waiter offered an extra splash of wine when it was clear we were going to finish our little tastes before we'd finished the food in front of us.

The wine tasting was a relative bargain at $80 each. We didn't feel like second-class citizens, and we were happy enough that we chalked up as an honest mistake that we were charged $130 for a bottle of Burgundy we hadn't ordered (when we noticed, they apologized and corrected the bill immediately). Mr. Marchal said there are always three sommeliers on the floor and each has responsibility for a certain section. Still, he said, "I try to drop by tables even if it's just to say hello." It's important, he said: "What if someone doesn't like the pairing? We can always try another. Some French people don't like American Cabernet Sauvignon. That's why we are here. We want you to have a good time."

Finally, there was Per Se, which was a pleasure -- although, in an utterly empty restaurant at 5:30, we had to reject two tables next to wait stations before getting a "good" table. (No matter how far in advance we called for a reservation, we were told that 5:30 and 9:30 were the only times available.) Per Se does not have a set wine-tasting menu but offers an extensive list of half bottles and suggests in print that diners choose half bottles to pair with courses. Instead, we asked the sommelier to choose for us, whether by the glass, the bottle or the half-bottle. We explained, as we always do, that we are wine-obsessed, and we clearly got our sommelier's attention when we said "we even like Zweigelt," the unusual, peppery red from Austria.

The result was a nice progression of wines, starting with a sake from Japan with the first course, oysters and caviar. It was a fascinating, flavorful pairing, but our favorite once again turned out to be a red wine, an Austrian Blaufränkisch, with fish. For dessert, the sommelier, who spent a great deal of time at our table, poured us each a glass of Zweigelt Trockenbeerenauslese from Alois Kracher, a rare wine made by a leader of the Austrian wine industry, who died recently at age 48.

At Per Se, "the wines are meant to set the background or enhance" the food, Roxane Shafaee-Moghadam, the sommelier, told us later. She, another sommelier and James Hayes, the head sommelier, who was not there that night, taste wines together. The Blaufränkisch, they decided, "had such nice, bright fruit. With the menu so varied, we thought it could work with the first meat course or a heavier shellfish course." She added, "The beauty of having only 15 tables is that you can listen to the guests and take risks."

This is the bottom line: When the idea of wine pairings with each course was new, it seemed sommeliers were genuinely excited. Not only that, it seemed the only people who would order it -- and pay the sometimes high freight -- were wine lovers, so there was a certain connection between diner and server. Now that pairings have become routine, some restaurants see it simply as a way to move some wine and move along the diners. The romance is largely gone.

We have found that when we order wines by the bottle, we slow a restaurant to our pace. We take a few minutes ordering the wine, then we drink some while we chat, then we order dinner and continue to sip, then maybe we order another bottle or glass. Our research has shown, unfortunately, that when we order the tasting menu, the restaurant puts us on its schedule, which is generally too rushed. (Even at Per Se, we had to insist that we were going to wait for some wine before we ate its classic amuse-bouche, the salmon tartare "ice cream cone." Then, the second the wine came, our waiter picked up the cone holder and held it for us to take a cone.)

There are wine dinners happening all the time featuring the wines of a certain region or producer, and those are often lovely. And we're sure there are restaurants that still treat their wine-pairing menus seriously and the people who order them special. But, from now on, we'll go back to ordering bottles from the wine list. For us, wine-tasting menus are a trend whose time has passed.

The Power of Penny Pritzker

Thu, 04 Sep 2008 01:24:07 GMT

http://www.bloomberg.com/news/marketsmag/mm_1008_story1.html

The billionaire head of Barack Obama's fundraising machine is the person to call when you want to ``get the job done,'' says Warren Buffett. Her critics say she's enriched herself at their expense.

By John Lippert
Bloomberg Markets, October 2008

Penny Pritzker was driving to Chicago's Midway Airport in June to meet Barack Obama when her cell phone rang.

She, the Obamas and campaign staff were flying to St. Paul, Minnesota, where Obama would proclaim himself the presumptive Democratic presidential nominee. Pritzker's 17-year-old son wanted to remind her to savor history in the making.

``Don called and said, `Don't do what you typically do, which is worry about the next thing you have to get done,''' recalls Pritzker, Obama's campaign finance chairwoman.

Don's hopes were dashed two days later. A photo showed a beaming Obama with his wife, Michelle, watching over his shoulder. They were riding in a freight elevator to address 32,000 fans crowding the Xcel Energy Center. Pritzker was staring down, typing an e-mail.

`I'm working on my BlackBerry, trying to respond to our supporters,'' Pritzker, 49, explains six weeks later at Chicago's Hyatt Center, headquarters for a family empire that her great-grandfather founded 106 years ago and is now worth as much as $40 billion.

`No Nonsense'

If Obama makes it to the White House, some of the credit will go to Pritzker for organizing the best-financed campaign in U.S. history. She's tapped such wealthy donors as hedge fund manager Kenneth Griffin and Warren Buffett, who was the main attraction at a pair of $28,500-per-person Chicago fundraisers in July.

And she's pulled in first-time contributors with their $5 pledges, generating an e-mail list of 5 million and counting. Obama raised $338 million through June compared with $212 million for Hillary Clinton, 60, and $136 million for John McCain, Federal Election Commission reports show. In July, Obama, 47, raised another $51 million and McCain, 71, tallied $27 million, their campaigns said.

`She's a no-nonsense, no-drama, no-ego person,'' Obama says during a July flight on his campaign jet from Butte, Montana, to St. Louis. ``She and I share certain core values about how to run organizations, and hopefully that will inform how we manage the government.''

Family Empire

Pritzker is heading Obama's fundraising at the same time she's in charge of four family businesses and is spearheading charities devoted to physical fitness and education.

She runs Classic Residence by Hyatt, a chain of retirement homes, and The Parking Spot, an airport shuttle service. She's president of Pritzker Realty Group and chairwoman of TransUnion LLC, a credit checking company. She's a director of Global Hyatt Corp., which owns or operates more than 365 hotels in 44 countries.

Pritzker is also helping to preside over an uneasy truce that will sell off some of the family companies and dismantle its empire. The breakup will give her and 10 siblings and cousins at least $1.35 billion apiece, according to court documents.

``The Pritzker holdings constitute one of the top 10 private wealth buckets in the U.S.,'' says Byron Trott, vice chairman of Goldman, Sachs & Co. and lead investment banker for the Pritzkers and Buffett. ``They've compounded wonderfully in value over the last 15 years, and Penny is one of two key operating executives.''

The other is her cousin Thomas, 58, chairman of Global Hyatt. The company operates 115,000 rooms worldwide. Marriott International Inc., the world's largest hotel chain, operates 545,000.

Hard Fighters

Pritzker has spent a good bit of her career fending off criticism about her family and her role in its businesses. U.S. government officials sued the Pritzkers to collect taxes from her grandfather Abram's estate after he died in 1986.

The case centered on hundreds of trust funds Abram had set up in the Caribbean to avoid taxes. In 2001, an Illinois savings and loan that was once headed by Penny collapsed. Some 1,400 depositors are still out about $10 million, says Clinton Krislov, an attorney suing Penny and bank officers on their behalf. That same year, part of her family turned on her when seven brothers and cousins alleged in court documents that she'd enriched herself at their expense.

``The Pritzkers fight as hard in their business deals as they do with each other,'' says Barry Render, a Chicago native and business professor at Rollins College in Winter Park, Florida.

Single-Minded

As an example, Render points to $7.6 million an investor group Penny headed paid the city of Orlando, Florida, for 1,100 acres (445 hectares) of land abandoned by the U.S. Navy in 1999. This year, the development has $1.1 billion in taxable property.

Pritzker says her contract, which she won through competitive bidding, increased Orlando's tax base.

Fran Sweet, a retired Ameritech Corp. manager, is more blunt. Sweet lost $100,000 in the failure of Hinsdale, Illinois- based Superior Bank, the S&L half owned by Penny's family.

``The Pritzkers are crooks,'' Sweet says. ``They don't care anything about people who spent their whole lives trying to save.''

Penny Pritzker defends her conduct.

``We had seven years of clean audits and then the auditors said, `Well, maybe we'll change the way we calculate,''' she says.

Iron Woman

Penny showed her single-mindedness early on. When she was a child, she spent Saturdays playing with her father Don's adding machines at Hyatt offices. At age 16, three years after her father died, she asked grandfather Abram for a role in the family companies.

In 1985, the year she started working at Hyatt, she entered an Ironman race in Hawaii that included a 2.4-mile (3.9- kilometer) swim, a 112-mile bicycle course and a 26.2-mile run. After tripping in a lava bed and spraining her ankle, she kept going.

When asked how far she ran while injured, she replies, ``Oh, something like 20 miles.''

This past July, she competed in a minitriathlon with her ophthalmologist husband, Bryan Traubert, 53; her son, Don; and her daughter, Rose, 15.

`Blew Me Away'

``I ran step-by-step with Rose until the last 300 yards, and then she blew me away,'' Pritzker says, her long, athletic hands folded in front of her in a Hyatt Center conference room, where an 18-inch (46-centimeter), caramel-colored ceramic dog by artist Jeff Koons is one of the few ornaments. `I got such joy out of that.''

In the campaign, Pritzker provides the discipline and organization needed to cash in on Obama's anti-war message and inspirational appeal, says Matthew Barzun, a fundraiser in Louisville, Kentucky.

In February 2007, Barzun, 37, asked Pritzker for permission to hold a $25-per-person money-raising event. She agreed as long as he didn't spend more than 5 percent of what he collected.

``That made us think, `Do we really need chicken?''' says Barzun, who went on to raise more than $500,000 for Obama. ``We served pitchers of water.''

Buffett praises Pritzker's management skills. His Berkshire Hathaway Inc. agreed in December to pay $4.5 billion for 60 percent of Marmon Holdings Inc., where Penny was a director from 2002 to '08.

`Get the Job Done'

While she was helping to run things and hire new managers for Marmon, which makes everything from water treatment equipment to brake drums, operating margins almost tripled to 12.4 percent, according to a press release. The company had $7 billion in annual revenue in 2007, up 30 percent in five years.

``Once she's in charge of something, you can forget about it, because she's going to get the job done,'' Buffett says via telephone from his office in Omaha, Nebraska. ``That's my yardstick for management performance.''

Pritzker is known for organizing her workload. She lays out detailed plans and then develops measurable goals for herself and subordinates, says Marty Nesbitt, 45, who's now president of The Parking Spot, which he and Pritzker started in 1998.

To run the shuttle service, with its Dalmatian-spotted vans, 800 employees in 19 locations and $100 million in annual revenue, Pritzker and Nesbitt meet face to face for about an hour each week. They spend an additional four hours each quarter at board meetings. Nesbitt says having a formal plan for growth and profit makes it easier to monitor day-to-day performance.

Always Available

Pritzker is always available to react to unexpected events by phone or e-mail, Nesbitt says. She spends early mornings and late nights on her computer at home.

``If I get an e-mail from Penny at 1 a.m. or 4 a.m., it doesn't surprise me,'' he says.

Pritzker's conduct has entangled her in controversy. In 2001, relatives including her younger brothers, Anthony and J.B., and her cousins John and Daniel accused her, Thomas and Nicholas Pritzker of paying themselves too much to run the family enterprise, moving assets to their own trust funds and failing to disclose those actions.

The disputed compensation and assets were worth about $1 billion, people familiar with the situation say. The squabble came to light when another cousin, then 19-year-old actress and Columbia University student Liesel Pritzker, filed a lawsuit claiming her father, Robert, had drained her trusts.

Robert denied in court documents that he'd done anything wrong. Thomas, Penny and Nicolas did the same. To avoid a court fight, the three of them agreed to a 10-year restructuring under which the family will keep some assets, sell others and share some with partners or public shareholders, Thomas Pritzker says. The family is also restructuring the 950 trust funds through which it controlled its empire in 2002.

Untangling Spaghetti

``I call it taking a bowl of spaghetti and untangling it,'' Thomas says. ``We don't know of anyone who's undertaken something with the complexity of this.''

The breakup is well under way. Trott's Goldman Sachs Capital Partners, the private equity arm of Goldman Sachs, plus an investment firm affiliated with Wal-Mart Stores Inc. Chairman Rob Walton, has spent $1.1 billion for a minority stake in Global Hyatt. In total, Hyatt may be worth $11 billion, says Ted Mandingo, owner of an Elmhurst, Illinois-based hotel consulting firm.

Selling Assets

The Pritzkers sold chewing tobacco maker Conwood Co. to Reynolds American Inc. for $3.5 billion in 2006. That year, they tried and failed to shed Triton Container International Ltd., a shipping container company, for as much as $2.5 billion. And Penny says they've sold a significant portion of a $5 billion real estate portfolio that she developed.

The Pritzkers own 80 percent of a partnership that holds a 15.6 percent stake in Royal Caribbean Cruises Ltd. The family portion was worth $719 million on Aug. 19. The Pritzkers list eight casinos on company Web sites. The casino licenses alone are worth $500 million each, says John Kindt, a University of Illinois business professor.

Next year, the family will open a Grand Hyatt hotel and casino with 2,973 rooms next to the Bellagio hotel in Las Vegas.

In six years, by the time Buffett buys the other 40 percent of Marmon, he'll have spent $10 billion-$11 billion to acquire that company, Trott says.

Buffett says he was so confident in the financial analysis that the Pritzkers developed for Marmon that he decided during a flight from San Francisco to Omaha to buy it.

``It came with a price attached,'' Buffett says. ``In the end, we could meet it.''

$40 Billion

All told, the Pritzker empire is worth as much as $40 billion, a person familiar with the situation estimates.

The family's offshore accounts prevent anyone from getting a complete picture of their wealth. In 1986, when Abram Pritzker died, his heirs claimed an estate worth $25,000. The Internal Revenue Service sued to collect $53 million in back taxes. The two sides settled in 1994 for $9.5 million, according to U.S. Tax Court records.

In his campaign, Obama says he wants to crack down on overseas tax havens and stop allowing hedge funds to pay a 15 percent capital gains rate on most income, rather than the 35 percent income tax rate.

``The top 50 hedge fund managers made $29 billion last year,'' Obama said in Philadelphia in April. ``That's not fair.''

Penny says there's no contradiction between her family's tax avoidance and her support for Obama.

``Our family has done more than just good tax planning,'' she says. ``What we're good at is building businesses, creating jobs and supporting our economy.''

Siding With Buffett

Pritzker says she agrees with Buffett, who spoke at the Museum of Contemporary Art in Chicago about social obligations of the rich.

``Warren said that over the last 20 years, the net worth of the 400 richest Americans has grown seven times and the average American's net earnings are flat. He said that's not right, and that's why he's a Democrat,'' Pritzker says. ``I agree. It's not good for our democracy.''

Depositors say Pritzker is on the wrong side of another hot-button issue -- the subprime meltdown. They're suing over the 2001 failure of Superior Bank.

Her political opponents have been quick to capitalize: ``Obama's National Finance Chair owned a failed bank that specialized in subprime lending,'' the Republican National Committee said on its Web site on June 9.

S&L Failure

Penny's uncle Jay Pritzker and his friend Alvin Dworman paid $42.5 million for the Lyons Savings Bank of Countryside, Illinois, in 1988. In 1993, the bank, renamed Superior, became a pioneer in the securitization of subprime mortgages. The resulting growth allowed the Pritzkers and Dworman to pay themselves $200 million in dividends and enabled Dworman to borrow $100 million.

In 2001, Superior's auditors, Ernst & Young LLP, concluded that income from securitizations had been overstated and recommended asset writedowns totaling $420 million. Regulators closed Superior in July 2001.

Five months later, the Pritzkers agreed to pay the Federal Deposit Insurance Corporation $460 million over 15 years, with no interest, to help cover losses. Penny represented the Pritzkers in negotiations, she says.

Tim Anderson, a retired Libertyville, Illinois, banking consultant, says that if the FDIC had asked ratings companies to lower their AAA outlook on Superior's securities, the move would have alerted Wall Street to subprime borrowing woes long before the current crisis.

`Clout, Cash and Connections'

What's bugging depositors is the FDIC's promise that the Pritzkers would get a portion of proceeds from its lawsuit against Ernst & Young for sloppy auditing. The firm settled in 2004 without admitting wrongdoing and paid the Pritzkers $31.3 million.

That payout should have gone to people who lost money, attorney Krislov says.

``When you've got clout, cash and connections, you can take a tough stand against the little guy,'' he says.

Rather than defend the family's actions in court, Penny agreed in December 2001 to reimburse the U.S. government for money paid to depositors. Through the FDIC, the government guarantees checking and savings accounts for a minimum of $100,000 and makes additional payments to depositors as assets of the failed bank are sold.

In the Red

These payments left people such as Sweet in the red. She deposited $500,000 in Superior a month before it closed and says she's worked as a paralegal to make up some of what she lost.

Pritzker says she recommended the agreement to her family after the September 2001 terrorist attacks in New York and Washington.

``It was unseemly, at a time post 9/11, to be in litigation with the federal government,'' she says.

Another Pritzker company that's run into controversy is credit reporting firm TransUnion. It controls the $3.3 billion market in equal shares with Atlanta-based Equifax Inc. and Dublin-based Experian Group Ltd.

After widespread consumer complaints about shoddy service in the credit checking industry, the U.S. Congress passed legislation in 2003 that allowed people to obtain free copies of credit reports so they could check for mistakes and block information obtained from identity theft.

That same year, a jury awarded Judy Thomas of Klamath Falls, Oregon, $5.3 million after she claimed TransUnion took six years to correct a mistake in her credit report. The award was later cut to $1.3 million. The company has always encouraged consumers to monitor their reports, Pritzker says.

TransUnion IPO?

Since Pritzker became chairwoman in 2005, she's taken steps that could lead to a public offering. She included independent directors such as John Canning, chairman of the Federal Reserve Bank of Chicago, and Joseph Mansueto, CEO of Morningstar Inc., the company known for its mutual fund ratings. TransUnion has the same governance as any public company, Canning says.

``We haven't made a decision about an IPO, but certainly we've put in place a structure where, if you decide to go that way, all you have to do is press a button,'' Canning says.

Today, the Pritzker empire consists largely of privately held companies. Even so, as anyone who visits Chicago knows, it's hard to miss the family name.

Ten Pritzker galleries house the Art Institute of Chicago's most precious paintings, including ``A Sunday on La Grande Jatte -- 1884'' by Georges Seurat. A Pritzker concert pavilion lies at the heart of Millennium Park. The University of Chicago has a Pritzker medical school. Northwestern University has a Pritzker law library.

`Very Lucky'

``Look, I'm very lucky,'' Pritzker says, wearing a thick string of white pearls and a light-gray suit that complements the black hair brushed over her forehead. ``The twists and turns that come with life are just that.''

In her public role, she spent 20 hours a month from 2004 to 2007 heading a task force with Griffin, the founder of Citadel Investment Group, and others to boost eligibility requirements for Chicago public school principals. She donated $4.5 million to the cause.

Griffin later raised as much as $100,000 for Obama, according to the candidate's Web site.

In May, Penny, Bryan, Don and Rose joined a ``fun run'' sponsored by a foundation called Chicago Run. She and Bryan set up the charity to combat obesity, a contributor to her father's death from a heart attack at age 39.

During three months this year, 2,350 Chicago school children registered to run 60,295 miles, says Arne Duncan, CEO of the city's public school system.

Defining Herself

Dressed in a T-shirt and shorts, Penny passed out water and registered participants, just like other moms. No one at the Douglas Park event would have known who she was, Duncan says.

``Historically, my family leaders preferred that we had no public presence,'' Pritzker says. ``In this day and age, with complete access to information, we can't take that position. It's important to define myself, as opposed to letting some other force define me.''

Pritzker began cultivating her identity early on. Three years after her father's death, she wrote to her grandfather, asking if she could be trained in the family business. At his 80th birthday party, Abram wore a tux that had the green stationery on which she'd penned her request sticking out of the breast pocket.

```How am I supposed to know that women are interested in business? I was born in 1896,''' Penny recalls Abram telling her. ```But if you're interested, I'll teach you accounting.'''

`Ungodly Smart'

Penny's mother Sue suffered from alcoholism, according to people familiar with the situation. She died in 1982 when she fell out of a truck that was towing her broken-down car. Penny had graduated from Harvard University a year earlier. She went on to get her Master of Business Administration and law degrees simultaneously from Stanford University in Palo Alto, California, in 1985.

Penny took Abram's offer to heart, relying on him and his oldest son, Jay, for guidance. Jay, Penny's uncle, had graduated from high school at age 14 and was the leader of the third generation.

``Jay was ungodly smart,'' says Buffett, who met him in 1954. ``He saw all aspects of a situation in about the first three seconds.''

After Stanford, Penny joined the law firm her great- grandfather Nicholas had started in 1902. He'd arrived in Chicago after escaping pogroms unleashed against Russia's Jews after the 1881 assassination of Czar Alexander II.

No Coat

He was so poor a hospital gave him a coat, Penny told a Harvard alumni club last year. He taught himself English, worked as a tailor's assistant and studied law at night.

Of his three sons, the star was Abram, who proved adept at buying Depression-era real estate. Under his leadership, the law firm started functioning as an investment bank.

The firm included Arthur Goldberg, who served on the U.S. Supreme Court from 1962 to 1965. Also a member was Stanford Clinton, who later became general counsel for the Teamsters union's Central States Pension Fund.

Clinton helped the Pritzkers obtain Teamsters loans to build hotels, according to the ``Kansas City Times.'' These loans totaled $54.4 million from 1966 to 1975, according to the newspaper, which published a Pulitzer Prize-winning story on the family after a skywalk in a Kansas City Hyatt collapsed in 1981, killing 114. The hotel was owned by Crown Center Redevelopment Corp., a subsidiary of Hallmark Cards Inc. Hyatt managed the hotel for Crown Center.

Tax-Free Deal

The Pritzkers declined to be interviewed by the ``Times,'' citing lawsuits after the skywalk collapse. The newspaper quoted Jay as telling the New Jersey Division of Gaming Enforcement in 1981 that the loans were legitimate business transactions, unconnected to the union's controversial reputation. Jimmy Hoffa, the former Teamsters general president and pension fund trustee, disappeared in 1975.

By then, Jay had been amassing companies and saving on taxes. Buffett, writing in his 1988 shareholder letter, says he met Jay when Jay was running a Brooklyn, New York, chocolate maker called Rockwood & Co.

Jay wanted to liquidate his cocoa bean inventory since the price had jumped 20 percent to 60 cents a pound. Rather than incurring a 50 percent tax by selling the beans, he exchanged them for outstanding shares of Rockwood stock.

This tax-free transaction was so popular with Buffett and other shareholders that Rockwood shares rose from $15 to $100 during the period shortly before the tender until shortly after it, according to Buffett.

``Thereafter, I avidly followed Jay's business dealings, which were many and brilliant,'' Buffett wrote to shareholders.

`Uncle Dad'

Jay bought the original Hyatt, near Los Angeles International Airport, in 1957. He wrote his $2.2 million offer on a napkin the same day he saw the hotel, says Melvyn Klein, a business partner from Corpus Christi, Texas.

Jay accelerated his growth by buying a half-finished hotel with a 23-story atrium in Atlanta in 1967 and calling it Hyatt Regency. He bought and sold Braniff Airlines, Ticketmaster Group Inc. and McCall's magazine. In 1988, he made a bid for RJR Nabisco Inc., Klein says, losing out to Kohlberg Kravis Roberts & Co. in what was at the time the most expensive takeover.

As Jay was building the empire, Penny says she grew so close to him that he signed letters ``Uncle Dad.'' She started at Hyatt in 1985 as a financial analyst.

`Completely Committed'

Thomas Pritzker says he'll never forget how she handled one of her first assignments. He asked her to find a building the Pritzkers could swap for a Hyatt property they wanted to divest, enabling them to incur lower taxes than if they'd simply sold it. Within 10 days, she tracked down brokers with buildings on which the swap, called a like-kind exchange, would work.

``She did the whole thing,'' Thomas says. ``All you had to do is say, `Penny, will you please go do this?'''

In 1987, Jay gave her $30 million to build upscale retirement homes called Classic Residence by Hyatt. By 1991, business was so slow she replaced its executives and told Jay he might have to close the company.

``I was asking him whether he should fire me,'' Penny Pritzker recalls. ``But Jay was saying, `This is great. She's concerned. She's completely committed.'''

Within six months, the U.S. started to pull out of a recession. The company stabilized. Today, Classic Residence has 21 retirement homes in 11 states. It generated $434 million in revenue in 2007.

`Focus on Mortality'

In 1995, Jay rewarded Penny's work by naming her, along with Thomas and Nicholas, as fourth-generation leaders. Estate planning wasn't one of Jay's strengths, says Klein, his business partner.

``This whole subject required Jay to focus on mortality,'' Klein says. ``That's an issue he didn't want to deal with.''

Family harmony didn't last long. Two years after Jay died at age 76 in 1999, seven relatives threatened to file a lawsuit to remove the leaders. They alleged that Penny, Thomas and Nicholas had paid themselves too much.

``The only alternative to such protracted and harmful litigation is a negotiated agreement,'' the dissidents said in a court document. ``Retaining the status quo was not -- and is not -- an option.''

Resolving Quarrels

In December 2001, the dissidents and family leaders reached a pact on the restructuring, according to court documents. They agreed family members would share audited financial reports, hold regular meetings and have recourse to independent arbitrators.

The family's effort to resolve quarrels in secret collapsed in November 2002, when Liesel filed her suit. She and her brother Matthew accused their then 76-year-old father, Robert, of draining their trust funds of more than $1 billion. They said he did so because he was angry at their mother, Irene, who'd divorced him, according to court documents. In 2005, Liesel and Matthew settled for $450 million each.

Thomas Pritzker says that as time goes on, all wealthy families come to include people with differing interests and capabilities.

``The challenge is to overlay a meritocracy on a family business,'' he says in a Hyatt Center conference room on the other end of the 47th floor from Penny's.

Thomas says the Pritzkers need 10 years for the restructuring partly because of the ad hoc way Jay organized the empire. As they unravel the trusts, the Pritzkers have to be careful not to trigger tax liabilities going back to 1961, when the first of the trusts was formed, Thomas says.

`Crisis du Jour'

``Vice president of `crisis du jour' is my title,'' he says, referring to his lead role in the restructuring.

Another road block is that in 2001, no single entity controlled Hyatt assets. Some hotels were owned by Marmon and some by family trusts; some hotel management contracts were held through a ready-mix concrete company.

Because of this convoluted structure, Hyatt missed a chance to merge with a major competitor in the early 1990s, Thomas says. He declined to name the potential partner.

Before they could begin to think about selling hotels, the Pritzkers had to spend 2 1/2 years creating a unified company called Global Hyatt, Thomas says.

This delay sparked disputes among the Pritzkers and several arbitrations since 2001, a person familiar with the situation says. Some family members blame Thomas for missing a chance for a Hyatt public offering before the subprime crisis and high gasoline prices reduced travel in 2007, this person says.

`Decent Person'

Thomas declined to comment on family discussions. He says the Pritzkers will consider a public offering when they've positioned Hyatt for sustained growth.

Penny declines to comment on the 2001 agreement, other than to say it's working. As evidence, she says she had dinner in July with a son of John Pritzker. The elder Pritzker was one of the dissidents.

``What's important is that however the ownership transforms, those businesses are left in a position where they're not torn apart,'' she says.

John, 54, who runs San Francisco-based private equity fund firm Geolo Capital, says in an e-mail he's satisfied with how things are turning out.

``Penny has commanded the respect of our family because she has earned it through her hard work, smarts, total effort,'' he says. ``Simply put, she is a good and decent person.''

Just as her family was heading into turmoil a decade ago, Pritzker met Obama through mutual friends at a YMCA in Chicago's Lakeview neighborhood. He was then serving in the Illinois senate.

YMCA Connections

The part of Lakeview, north of downtown, where the YMCA was based was in the early stages of middle-class gentrification. Pritzker went there so her elementary-school-age kids could attend a basketball clinic run by Craig Robinson, Michelle Obama's brother.

Robinson, who was a vice president and bond trader at Morgan Stanley in Chicago, introduced Pritzker to the Obamas. Today he's the head basketball coach at Oregon State University.

The Parking Spot President Nesbitt encouraged Penny to take her children to the YMCA. Nesbitt had known Robinson for 20 years and was friendly with the Obamas, choosing Barack as the godfather of his youngest son, Xavier. The Obamas went to the YMCA to watch Nesbitt's oldest son, Alex, play.

``We came there to spend time with our kids, and we grew close because there was a consciousness of shared values -- a commitment to the city, a strong work ethic and a certain comfort in a diverse community,'' Nesbitt says.

Summer Home

As their friendship deepened, Penny invited the Obamas to spend weekends at her summer home near South Haven, Michigan. The Pritzkers live in a three-story, stucco-and-glass house that sprawls across five city lots on a Lincoln Park street filled with Chicago's priciest homes.

At Penny's urging, her children attend high school 10 miles to the south in Hyde Park at the University of Chicago Laboratory Schools. Half of the students are professors' children and 40 percent are ``children of color,'' says director David Magill. Michelle Obama, 44, is on the board, along with Pritzker, Nesbitt and John Rogers, CEO of Ariel Investments LLC, the oldest minority-owned money management firm in the U.S. Rogers is another $500,000 fundraiser for Obama.

In July, he hosted a fundraiser for the candidate that Buffett attended and delighted the billionaire by serving Cherry Cokes, miniature hot dogs and candy made by See's, a company Berkshire owns.

Cherry Cokes

``You have to feed me like I'm 5 years old,'' Buffett says.

Such relationships show how Obama's campaign is rooted in alliances among black business and community leaders such as Rogers and wealthy, white so-called lakefront liberals like Pritzker, says Joel Kotkin, a historian who's written about Chicago and other cities at Chapman University in Orange, California.

In 2004, Obama gained another local tie as he ran for the U.S. Senate. He accepted the endorsement of Richard Daley, whose family has run city hall for 40 of the past 53 years. Daley endorsed Obama for president in 2007.

``This is a one-party system,'' Kotkin says. ``It pays to be on the side that runs things.''

During Obama's U.S. Senate campaign, Pritzker served on his fundraising committee. Nesbitt says he's believed since then that Obama could be president and could unite a country seeking alternatives to the policies of George W. Bush. To do that, he needed money.

``That's when we all started spinning around in our chairs looking at Penny,'' he recalls.

`Destiny Knocking'

Pritzker told her husband that because she was so busy, she'd refuse if Obama offered her the fundraising job. That changed when Bryan -- to emphasize his point -- pounded on the door of their kitchen in January 2007 and said:

``This is destiny knocking on the door of your country. You have to find a way to help Barack.'' After checking with her children, she said yes when Obama approached her.

When Obama decided to forgo public funding and compete in Republican strongholds like Virginia, he placed a big bet on Pritzker.

Obama's team planned to bring in $450 million for the campaign and the Democratic National Committee from mid-June through November, several fundraisers say. That compares with $350 million that John McCain and the Republican National Committee planned to raise, McCain campaign manager Rick Davis says. McCain will start his post-convention presidential bid with $84.1 million in public funds.

Anti-War

At the outset, Pritzker had the advantage of Obama's clear opposition to the Iraq War and his motivational speeches, says Steve Grossman, a former Democratic National Committee chairman and Hillary Clinton fundraiser.

He stood apart from all of the other candidates, enlisting anti-war, Internet-savvy Democrats who'd backed Howard Dean in 2004, Grossman says. As Obama harnessed the Web to reach first- time voters and donors, Clinton relied on her 30-year network of activists, Grossman says.

Pritzker raised $25 million for Obama in the first quarter of 2007, $1 million less than Clinton's campaign raised. She reinforced Obama's egalitarian appeal by not conferring fancy titles on big donors and not forcing fundraisers to use the same tactics in every city, says Kirk Dornbush, an Atlanta biotech investor and Obama supporter.

`I Trust Her'

Even if people paid $2 for a button, Pritzker and her finance director, Julianna Smoot, had them fill out a donation form, Dornbush says. That helped to create an e-mail list that now includes 5 million people.

As she turned to Buffett and other high-dollar donors, Pritzker's name helped open doors, says Valerie Jarrett, 51, an Obama confidant and investor with Penny in a downtown Chicago apartment complex that was sold last year.

Pritzker was determined to respond quickly and accurately when potential givers inquired about Obama's positions on issues. She checked frequently with Jarrett.

``I hear from Penny all the time at 2 a.m.,'' Jarrett says.

Obama credits Pritzker with placing an urgent phone call asking him to reroute his plane to Des Moines, Iowa, in October 2007 to reassure fundraisers despondent over his low poll standings.

``I trust her that if she's bringing something to me, it's worth paying attention to,'' Obama says.

What's Next?

Steve Westly, a former EBay Inc. senior vice president who ran for governor of California in 2006, says Pritzker's organizational skills have had a big impact.

``With Penny, the meetings started on time,'' he says. ``We had clear PowerPoint slides and clear guidelines. We hit all the numbers. I've been active in the last seven presidential campaigns, and I can tell you, these things never happen in the Democratic Party.''

Pritzker's campaign work will open new doors, says Westly, another $500,000 Obama fundraiser.

``Penny has succeeded at the highest levels of the political world and highest levels of the corporate world,'' he says. ``Every opportunity in the country will be at her doorstep.''

When Obama met with his economic advisers on July 28 in Washington, Pritzker participated along with Buffett, Robert Rubin, 69, chairman of Citigroup Inc.'s executive committee, and Paul Volcker, 80, former chairman of the Federal Reserve.

Great-Grandfather's Words

Pritzker says she's thinking about Obama's winning, not what she'll do after the election. As she looks ahead, she's still influenced by a small book her great-grandfather Nicholas wrote just before his death in 1957. Immortality, he wrote, is achieved chiefly in values people pass on to their children.

During Don's summer vacation, Pritzker encouraged her son to volunteer at the Learn Charter School to teach remedial fifth-grade math. The school is six blocks west of Douglas Park, which was a magnet for the Jewish immigrants like her family that poured into Chicago from Russia and Eastern Europe.

Four generations later, Penny Pritzker has emerged as the public face of a private dynasty. She has started and managed companies, run charities, fended off attacks by siblings and weathered regulatory actions and lawsuits. She's now brought her pragmatism and single-mindedness to managing the finances of another citizen of Chicago whose narrative arc stretches, like hers, back to far-off lands.

Whether her husband was right and the knock on their kitchen door in January 2007 was destiny or just another episode in Pritzker's already accomplished life will become clear in November.

To contact the reporter on this story: John Lippert at jlippert@bloomberg.net

Wednesday, September 03, 2008

Wed, 03 Sep 2008 22:23:43 GMT

'Whatever you give a woman, she's going to multiply. If you give her sperm, she'll give you a baby.
If you give her a house, she'll give you a home. If you give her groceries, she'll give you a meal.
If you give her a smile, she'll give you her heart. She multiplies and enlarges what is given to her.'

So - if you give her crap, you will receive a bucket full of shit.

Love and appreciate all the women in your life.

Q&A with John Singleton: Failure fear drove Singo

Tue, 02 Sep 2008 23:42:17 GMT

By Nick Gardner
September 01, 2008 12:00am
http://www.news.com.au/dailytelegraph/story/0,,24273524-5014101,00.html

JOHN Singleton started out working hard at emptying slop buckets, writes Nick Gardner

* name: John Singleton

* founder: STW Group Limited

What did you want to be when you were growing up?

I wanted to be a butcher a barrister or journalist. So I guess I've become a combination of all of that.

I still love chopping meat, debating and writing. And it was actually journalism I first tried to get into through a cadetship at The Daily Telegraph, but you turned me down.

What was your first job?

I worked as a despatch boy for a year at J Walter Thompson, which wasn't much fun, emptying slop buckets, getting lunch for the directors, and they paid six quid a week. When we finished up a few years ago I owned 49 per cent of it. Funny.

I was desperate for a quid back then so I'd work nights shoveling lead for typesetters and I also earned a bit playing junior rugby league. I got 30 bob for a win and 10 bob a loss.

Then I got a job in the copywriting department and I used to get into work before anybody else to try and get the good jobs - I was just 17 - and one day because I was first in I got to work on Margaret Fulton's account, and pretty soon afterwards I was doing Kelloggs promotions, kids quizzes and stuff like that. I jumped through the ranks real quick.

What was your first break?

Difficult to say. I was made national creative director for Berrie Curry, a top ad agency at the age of 24. I worked incredibly hard and tried to be smart. I didn't go for boozy lunches, but I did give up my personal life for work.

Soon after I set up my own agency, Spasm - that was 1968. Forty bloody years ago. It was a massive success and every Friday night we'd all be out in Darlinghurst having the biggest parties in town and you lot from the Telegraph and Mirror were half the crowd. Gerry Harvey was there, Jack Cowan, Kerry Packer, Trevor Kennedy, Bob Askin, they were all there. It was great.

Spasm was the first agency I started and I made a fortune - more through desperation than brilliance. I was terrified of failure. It was so successful I quit at 35.

I couldn't get traditional clients, so I went to relatively unknown brands and promised to make them famous. I persuaded Gerry Harvey to advertise on TV - he'd never done it before and now he's probably the biggest TV advertiser.

I got a few great clients but where I made a big quid was not like other agencies. I used to produce books and records and market them effectively using TV advertising, then take a royalty on each sale. It was risky because if it didn't work I was left with all the costs but it worked more often than not. We did a book called the Best ever Chinese recipes and it sold 1.6 million copies - and we made 50c a copy. The money was pouring in.

Then I sold out. I always promised myself I'd retire at 35 and I did.

Who has been your biggest influence?

No individual. I had a wonderful family life but we were broke. I wanted to have enough money for a racehorse, my own car and a better home, so my wife, well, if she hadn't held off having a family until we were in our late 20s, it would have held me back, so she played a huge part. But my biggest driver was fear of failure. That still drives me now. It's not so much that I wanted to be wealthy, I just didn't want to be broke.

Best strategic decision?

Getting back into advertising when I was 44. It was a lot easier the second time around. I'd made all the mistakes the first time.

What has been your worst professional mistake?

Retiring at 35. No question. If I wanted to be super successful, taking 10 years off was not the smartest thing to do. But I'd worked so hard for ages, I had no desire for any more power or wealth, I just wanted a good time. So I went from being highly driven to just seeing what happened. I really went for it though, I kicked all those goals. I was out all the time. I got on the piss with John Laws one time and we ended up doing a radio show together for an hour a day called Bogan and Ocker, it became the No.1 show.

Then Channel 10 heard it and wanted to make it a TV show. When Rupert (Murdoch) took over he said I'd be the new Johnny Carson and gave me a Saturday night show. He loved it but I hated it. He offered me more money but I just couldn't.

This was in the early '80s. I left and felt I let Rupert down very badly, but I'd run out of people to interview.

What is the best piece of advice you have received or can offer?

Boards are a waste of time. Hire a good CEO and tell them what to do.

What businessman or woman do you most admire and why?

Rupert Murdoch, without question. I remember back in my 20s, speaking to Rupert Murdoch, he was trying to sell me space in his paper in Adelaide, and I was telling him the future was in TV. But look at where he has gone. I had a chance to be as successful as him but I stuck in advertising and retired at 35. He kept going and conquered the world.

Funny, looking back at how young we all were, myself, Rupert, who didn't mind a flutter back in those days, we didn't see how big we were going to be - myself, Gerry Harvey, Kerry Packer, they were just mates. But Rupert is the best of them all.

Who or what couldn't you do your job without?

I couldn't do it without my great PA, Dianna Crawley. She's hopeless really - nah only kidding. She's fantastic. Been with me 20 years now and she knows what is going on in every aspect of my life, sorts it all out for me. She's truly great.

What has been the high point of your career so far?

There have been so many. Going out on my own and making a success of it by playing a different game entirely, taking a royalty and seeing that succeed. We took a Johnny Cash record that had sold 1000 copies from Woolies, doubled the price, did some good TV advertising and sold an absolute stack of them.

But you know, I was in New York a few months ago and in every window in Victoria's Secret was the bra we've been promoting, the biofit bra from from Pleasure State. It was designed in Sydney by brilliant young Aussies and it's even been on the Oprah show. The launch commercial was the most watched in American history. It's nice to have something so fantastic happen so recently.

Catastrophe Bonds - In Nature's Casino

Tue, 02 Sep 2008 08:43:38 GMT

By MICHAEL LEWIS

Published: August 26, 2007
http://query.nytimes.com/gst/fullpage.html?res=9C05E1DE103FF935A1575BC0A9619C8B63&sec=&spon=&pagewanted=all

It was Aug. 24, 2005, and New Orleans was still charming. Tropical Depression 12 was spinning from the Bahamas toward Florida, but the chances of an American city's being destroyed by nature were remote, even for one below sea level. An entire industry of weather bookies -- scientists who calculate the likelihood of various natural disasters -- had in effect set the odds: a storm that destroys $70 billion of insured property should strike the United States only once every 100 years. New Orleanians had made an art form of ignoring threats far more likely than this; indeed, their carelessness was a big reason they were supposedly more charming than other Americans. And it was true: New Orleanians found pleasure even in oblivion. But in their blindness to certain threats, they could not have been more typically American. From Miami to San Francisco, the nation's priciest real estate now faced beaches and straddled fault lines; its most vibrant cities occupied its most hazardous land. If, after World War II, you had set out to redistribute wealth to maximize the sums that might be lost to nature, you couldn't have done much better than Americans had done. And virtually no one -- not even the weather bookies -- fully understood the true odds.

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 people's money in buying what are known as ''cat bonds.'' 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 -- an insurance company looking to insure itself against extreme losses -- pays the buyer a high rate of interest.

Whatever image pops to mind when you hear the phrase ''hedge fund manager,'' Seo (pronounced so) undermines it. On one hand, he's the embodiment of what Wall Street has become: quantitative. But he's quirky. Less interested in money and more interested in ideas than a Wall Street person is meant to be. He inherited not money but math. At the age of 14, in 1950, his mother fled North Korea on foot, walked through live combat, reached the United States and proceeded to become, reportedly, the first Korean woman ever to earn a Ph.D. in mathematics. His father, a South Korean, also came to the United States for his Ph.D. in math and became a professor of economic theory. Two of his three brothers received Ph.D.'s -- one in biology, the other in electrical engineering. John took a physics degree from M.I.T. and applied to Harvard to study for his Ph.D. As a boy, he says, he conceived the idea that he would be a biophysicist, even though he didn't really know what that meant, because, as he puts it, ''I wanted to solve a big problem about life.'' He earned his doctorate in biophysics from Harvard in three years, a department record.

His parents had raised him to think, but his thoughts were interrupted once he left Harvard. His wife was pregnant with their second child, and the health plan at Brandeis University, where he had accepted a job, declared her pregnancy a pre-existing condition. He had no money, his parents had no money, and so to cover the costs of childbirth, he accepted a temp job with a Chicago trading firm called O'Connor and Associates. O'Connor had turned a small army of M.I.T. scientists into options traders and made them rich. Seo didn't want to be rich; he just wanted health insurance. To get it, he agreed to spend eight weeks helping O'Connor price esoteric financial options. When he was done, O'Connor offered him 40 grand and asked him to stay, at a starting salary of $250,000, 27 times his post-doc teaching salary. ''Biophysics was starved for resources,'' Seo says. ''Finance was hurling resources at problems. It was almost as if I was taking it as a price signal. It was society's way of saying, Please, will you start solving problems over here?''

His parents, he suspected, would be appalled. They had sacrificed a lot for his academic career. In the late 1980s, if you walked into the Daylight Donuts shop in Dallas, you would have found a sweet-natured Korean woman in her early 50s cheerfully serving up honey-glazed crullers: John's mom. She had abandoned math for motherhood, and then motherhood for doughnuts, after her most promising son insisted on attending M.I.T. instead of S.M.U., where his tuition would have been free. She needed money, and she got it by buying this doughnut shop and changing the recipe so the glaze didn't turn soggy. (Revenues tripled.) Whatever frustration she may have felt, she hid, as she did most of her emotions. But when John told her that he was leaving the university for Wall Street, she wept. His father, a hard man to annoy, said, ''The devil has come to you as a prostitute and has asked you to lie down with her.''

A willingness to upset one's mother is usually a promising first step to a conventional Wall Street career. But Seo soon turned Wall Street into his own private science lab, and his continued interest in deep questions mollified even his father. ''Before he got into it, I strongly objected,'' Tae Kun Seo says. ''But now I think he's not just grabbing money.'' He has watched his son quit one firm to go to work for another, but never for a simple promotion; instead, John has moved to learn something new. Still, everywhere he goes, he has been drawn to a similar thorny problem: the right price to charge to insure against potential losses from extremely unlikely financial events. ''Tail risk,'' as it is known to quantitative traders, for where it falls in a bell-shaped probability curve. Tail risk, broadly speaking, is whatever financial cataclysm is believed by markets to have a 1 percent chance or less of happening. In the foreign-exchange market, the tail event might be the dollar falling by one-third in a year; in the bond market, it might be interest rates moving 3 percent in six months; in the stock market, it might be a 30 percent crash. ''If there's been a theme to John's life,'' says his brother Nelson, ''it's pricing tail.''

And if there has been a theme of modern Wall Street, it's that young men with Ph.D.'s who approach money as science can cause more trouble than a hurricane. John Seo is oddly sympathetic to the complaint. He thinks that much of the academic literature about finance is nonsense, for instance. ''These academics couldn't understand the fact that they couldn't beat the markets,'' he says. ''So they just said it was efficient. And, 'Oh, by the way, here's a ton of math you don't understand.' '' He notes that smart risk-takers with no gift for theory often end up with smart solutions to taking extreme financial risk -- answers that often violate the academic theories. (''The markets are usually way ahead of the math.'') He prides himself on his ability to square book smarts with horse sense. As one of his former bosses puts it, ''John was known as the man who could price anything, and his pricing felt right to people who didn't understand his math.''

In the mid-1990s, when Wall Street first noticed money to be made covering the financial risks associated with hurricanes and earthquakes, it was inevitable that someone would call John Seo to ask him if he could figure out how to make sense of it. Until then, he had specialized in financial, not natural, disasters. But there was a connection between financial catastrophe and natural catastrophe. Both were extreme, both were improbable and both needed to be insured against. The firm that called him was Lehman Brothers, whose offer enticed Seo to quit his job and spend his first year at Lehman learning all he could about the old-fashioned insurance industry.

Right away, he could see the problem with natural catastrophe. An insurance company could function only if it was able to control its exposure to loss. Geico sells auto insurance to more than seven million Americans. No individual car accident can be foreseen, obviously, but the total number of accidents over a large population is amazingly predictable. The company knows from past experience what percentage of the drivers it insures will file claims and how much those claims will cost. The logic of catastrophe is very different: either no one is affected or vast numbers of people are. After an earthquake flattens Tokyo, a Japanese earthquake insurer is in deep trouble: millions of customers file claims. If there were a great number of rich cities scattered across the planet that might plausibly be destroyed by an earthquake, the insurer could spread its exposure to the losses by selling earthquake insurance to all of them. The losses it suffered in Tokyo would be offset by the gains it made from the cities not destroyed by an earthquake. But the financial risk from earthquakes -- and hurricanes -- is highly concentrated in a few places.

There were insurance problems that were beyond the insurance industry's means. Yet insurers continued to cover them, sometimes unenthusiastically, sometimes recklessly. Why didn't insurance companies see this? Seo wondered, and then found the answer: They hadn't listened closely enough to Karen Clark.

Thirteen years before what would become Tropical Storm Katrina churned toward Florida -- on Monday, Aug. 24, 1992 -- Karen Clark walked from her Boston office to a nearby Au Bon Pain. Several hours earlier, Hurricane Andrew had struck Florida, and she knew immediately that the event could define her career. Back in 1985, while working for an insurance company, Clark wrote a paper with the unpromising title ''A Formal Approach to Catastrophe Risk Assessment in Management.'' In it, she made the simple point that insurance companies had no idea how much money they might lose in a single storm. For decades Americans had been lurching toward catastrophe. The 1970s and '80s were unusually free of major storms. At the same time, Americans were cramming themselves and their wealth onto the beach. The insurance industry had been oblivious to the trends and continued to price catastrophic risk just as it always had, by the seat of its pants. The big insurance companies ran up and down the Gulf Coast selling as many policies as they could. No one -- not even the supposed experts at Lloyd's of London -- had any idea of the scope of new development and the exposure that the insurance industry now had.

To better judge the potential cost of catastrophe, Clark gathered very long-term historical data on hurricanes. ''There was all this data that wasn't being used,'' she says. ''You could take it, and take all the science that also wasn't being used, and you could package it in a model that could spit out numbers companies could use to make decisions. It just seemed like such an obvious thing to do.'' She combined the long-term hurricane record with new data on property exposure -- building-replacement costs by ZIP code, engineering reports, local building codes, etc. -- and wound up with a crude but powerful tool, both for judging the probability of a catastrophe striking any one area and for predicting the losses it might inflict. Then she wrote her paper about it.

The attention Clark's paper attracted was mostly polite. Two years later, she visited Lloyd's -- pregnant with her first child, hauling a Stone Age laptop -- and gave a speech to actual risk-takers. In nature's casino, they had set themselves up as the house, and yet they didn't know the odds. They assumed that even the worst catastrophe could generate no more than a few billion dollars in losses, but her model was generating insured losses of more than $30 billion for a single storm -- and these losses were far more likely to occur than they had been in the previous few decades. She projected catastrophic storms from the distant past onto the present-day population and storms from the more recent past onto richer and more populated areas than they had actually hit. (If you reran today the hurricane that struck Miami in 1926, for instance, it would take out not the few hundred million dollars of property it destroyed at the time but $60 billion to $100 billion.) ''But,'' she says, ''from their point of view, all of this was just in this computer.''

She spoke for 45 minutes but had no sense that she had been heard. ''The room was very quiet,'' she says. ''No one got up and left. But no one asked questions either. People thought they had already figured it out. They were comfortable with their own subjective judgment.'' Of course they were; they had made pots of money the past 20 years insuring against catastrophic storms. But -- and this was her real point -- there hadn't been any catastrophic storms! The insurers hadn't been smart. They had been lucky.

Clark soon found herself in a role for which she was, on the surface at least, ill suited: fanatic. ''I became obsessed with it,'' she says. One big player in the insurance industry took closer notice of her work and paid her enough to start a business. Applied Insurance Research, she called it, or A.I.R. Clark hired a few scientists and engineers, and she set to work acquiring more and better data and building better models. But what she really was doing -- without quite realizing it -- was waiting, waiting for a storm.

Hurricane Andrew made landfall at 5 on a Monday morning. By 9 she knew only the path of the storm and its intensity, but the information enabled her to estimate the losses: $13 billion, give or take. If builders in South Florida had ignored the building codes and built houses to lower standards, the losses might come in even higher. She faxed the numbers to insurers, then walked to Au Bon Pain. Everything was suddenly more vivid and memorable. She ordered a smoked-turkey and Boursin cheese sandwich on French bread, with lettuce and tomato, and a large Diet Coke. It was a nice sunny day in Boston. She sat outside at a small black table, alone. ''It was too stressful to be with other people,'' she says. ''I didn't want to even risk a conversation.'' She ate in what she describes as ''a catatonic state.'' The scuttlebutt from Lloyd's already had it that losses couldn't possibly exceed $6 billion, and some thought they were looking at a loss of just a few hundred million. ''No one believed it,'' she says of her estimate. ''No one thought it was right. No one said, 'Yeah, $13 billion sounds like a reasonable number.' '' As she ate, she wondered what $13 billion in losses looked like.

When she returned to the office, her phones were ringing. ''People were outraged,'' she says. ''They thought I was crazy.'' One insurance guy called her, chortling. ''A few mobile homes and an Air Force base -- how much could it be?'' he said.

It took months for the insurers to tote up their losses: $15.5 billion. (Building codes in South Florida had not been strictly enforced.) Fifteen and a half billion dollars exceeded all of the insurance premiums ever collected in Dade County. Eleven insurance companies went bust. And this wasn't anything like the perfect storm. If it had gone into Miami, it could have bankrupted the whole industry. Clark had been right: the potential financial losses from various catastrophes were too great, and too complicated, to be judged by human intuition. ''No one ever called to congratulate me,'' Clark says, laughing. ''But I had a lot of people call and ask to buy the model.''

After Hurricane Andrew came a shift in the culture of catastrophe. ''This one woman really created the method for valuing this risk,'' says John Seo. Clark's firm, A.I.R., soon had more than 25 Ph.D.'s on staff and two competitors, Eqecat and Risk Management Solutions. In its Bay Area offices, R.M.S. now houses more than 100 meteorologists, seismologists, oceanographers, physicists, engineers and statisticians, and they didn't stop at hurricanes and earthquakes but moved on to flash floods, wildfires, extreme winter storms, tornadoes, tsunamis and an unpleasant phenomenon delicately known as ''extreme mortality,'' which, more roughly speaking, is the possibility that huge numbers of insured human beings will be killed off by something like a global pandemic.

The models these companies created differed from peril to peril, but they all had one thing in common: they accepted that the past was an imperfect guide to the future. No hurricane has hit the coast of Georgia, for instance, since detailed records have been kept. And so if you relied solely on the past, you would predict that no hurricane ever will hit the Georgia coast. But that makes no sense: the coastline above, in South Carolina, and below, in Florida, has been ravaged by storms. ''You are dealing with a physical process,'' says Robert Muir-Wood, the chief scientist for R.M.S. ''There is no physical reason why Georgia has not been hit. Georgia's just been lucky.'' To evaluate the threat to a Georgia beach house, you need to see through Georgia's luck. To do this, the R.M.S. modeler creates a history that never happened: he uses what he knows about actual hurricanes, plus what he knows about the forces that create and fuel hurricanes, to invent a 100,000-year history of hurricanes. Real history serves as a guide -- it enables him to see, for instance, that the odds of big hurricanes making landfall north of Cape Hatteras are far below the odds of them striking south of Cape Hatteras. It allows him to assign different odds to different stretches of coastline without making the random distinctions that actual hurricanes have made in the last 100 years. Generate a few hundred thousand hurricanes, and you generate not only dozens of massive hurricanes that hit Georgia but also a few that hit, say, Rhode Island.

The companies' models disagreed here and there, but on one point they spoke with a single voice: four natural perils had outgrown the insurers' ability to insure them -- U.S. hurricane, California earthquake, European winter storm and Japanese earthquake. The insurance industry was prepared to lose $30 billion in a single event, once every 10 years. The models showed that a sole hurricane in Florida wouldn't have to work too hard to create $100 billion in losses. There were concentrations of wealth in the world that defied the logic of insurance. And most of them were in America.

The more John Seo looked into the insurance industry, the more it seemed to be teetering at the edge of ruin. This had happened once before, in 1842, when the city of Hamburg burned to the ground and bankrupted the entire German insurance industry many times over. Out of the ashes was born a new industry, called reinsurance. The point of reinsurance was to take on the risk that the insurance industry couldn't dilute through diversification -- say, the risk of an entire city burning to the ground or being wiped off the map by a storm. The old insurance companies would still sell policies to the individual residents of Hamburg. But they would turn around and hand some of the premiums they collected to Cologne Re (short for reinsurance) in exchange for taking on losses over a certain amount. Cologne Re would protect itself by diversifying at a higher level -- by selling catastrophic fire insurance to lots of other towns.

But by their very nature, the big catastrophic risks of the early 21st century couldn't be diversified away. Wealth had become far too concentrated in a handful of extraordinarily treacherous places. The only way to handle them was to spread them widely, and the only way to do that was to get them out of the insurance industry and onto Wall Street. Today, the global stock markets are estimated at $59 trillion. A 1 percent drop in the markets -- not an unusual event -- causes $590 billion in losses. The losses caused by even the biggest natural disaster would be a drop in the bucket to the broader capital markets. ''If you could take a Magnitude 8 earthquake and distribute its shock across the planet, no one would feel it,'' Seo says. ''The same principle applies here.'' That's where catastrophe bonds came in: they were the ideal mechanism for dissipating the potential losses to State Farm, Allstate and the other insurers by extending them to the broader markets.

Karen Clark's model was, for Seo, the starting point. When he first stumbled upon it and the other companies' models, he found them ''guilty until proven innocent,'' as he puts it. ''I could see the uncertainty in them,'' he says, ''just by looking at the different numbers they generated for the same storm.'' When they run numbers to see what would happen if the 1926 Miami hurricane hit the city today, A.I.R. puts the losses at $80 billion, R.M.S. at $106 billion and Eqecat at $63 billion. They can't all be right. But they didn't need to be exactly right, just sort of right, and the more he poked around inside them, the more he felt they were better than good enough to underpin financial decisions. They enabled you to get a handle on the risk as best you could while acknowledging that you would never know it exactly. And after all, how accurate were the models that forecast the likelihood that Enron would collapse? Next to what Wall Street investors tried to predict every day, natural disasters seemed almost stable. ''In the financial markets, you have to care what other people think, even if what they think is screwed up,'' Seo says. ''Crowd dynamics build on each other. But these things -- hurricanes, earthquakes -- don't exhibit crowd behavior. There's a real underlying risk you have to understand. You have to be a value investor.''

The models were necessary but insufficient. True, they gave you a rough sense of the expected financial losses, but they said nothing about the rewards. Financial markets exist only as long as investors feel the odds are stacked in their favor. Investors -- unlike roulette players -- can honestly expect to make a gain (their share in the profits of productive enterprise). But how big a gain? How should the payout vary, from government bonds to blue-chip stocks to subprime mortgages? The rewards in each market tended to vary with investors' moods, but those in catastrophe insurance were just incredibly volatile. Hurricane insurance rates would skyrocket after a big storm, then settle back down. This wouldn't do: if big investors were going to be persuaded to take billions of dollars in catastrophic risk, they would need to feel there was some reason in the pricing of that risk. ''The market,'' as Seo puts it, ''needs an acceptable mode of failure.''

In the spring of 2001, to the surprise of his colleagues, Seo left his big Wall Street firm and opened a hedge fund -- which, he announced, wouldn't charge its investors the standard 2 percent of assets and 20 percent of returns but a lower, flat fee. ''It was quixotic,'' says Paul Puleo, a former executive at Lehman who worked with Seo. ''He quits this high-paying job to basically open a business in his garage in a market that doesn't exist.'' Seo opened his new shop with his younger brother Nelson and then brought in their older brother, Michael. (His third brother, Scott, had studied astrophysics but decided that ''there was no future in astrophysics'' and eventually turned himself into an ophthalmologist.) Seo named his firm Fermat Capital Management, after one of his intellectual heroes. ''I had once read the letters between Pierre de Fermat and Blaise Pascal,'' he wrote in a recent e-mail message. ''From my father I had learned that most great mathematicians were nasty guys and total jerks (check out Isaac Newton . . . extra nasty guy), but when I read the Fermat-Pascal letters, you could see that Fermat was an exception to the stereotype . . . truly a noble person. I loved his character and found that his way of analyzing profitless games of chance (probability theory) was the key to understanding how to analyze profitable games of chance (investment theory).''

Four years later, Seo's hedge fund still faced two problems. The smaller one was that investors were occasionally slow to see the appeal of an investment whose first name was catastrophe. As one investor put it, ''My boss won't let me buy bonds that I have to watch the Weather Channel to follow.'' That objection doesn't worry Seo much. ''Investors who object to cat-bond investing usually say that it's just gambling,'' he says. ''But the more mature guys say: 'That's what investing is. But it's gambling with the odds in your favor.' ''

His bigger problem was that insurance companies still didn't fully understand their predicament: they had $500 billion in exposure to catastrophe but had sold only about $5 billion of cat bonds -- a fifth of them to him. Still, he could see their unease in their prices: hurricane- and earthquake-insurance premiums bounced around madly from year to year. Right after Andrew, the entire industry quintupled its prices; a few tranquil years later, prices were back down nearly to where they had been before the storm. Financial markets bounced around wildly too, of course, but in the financial markets, the underlying risks (corporate earnings, people's moods) were volatile. The risk in natural-disaster insurance was real, physical and, in principle, quantifiable, and from year to year it did not change much, if at all. In effect, the insurers weren't insuring against disaster; they were only pretending to take the risk, without actually doing so, and billing their customers retroactively for whatever losses they incurred. At the same time, they were quietly sneaking away from catastrophe. Before the 1994 Northridge earthquake, more than a third of California homeowners had quake insurance; right after, the insurers fled the market, so that fewer than 15 percent of California homeowners have earthquakes in their policies today.

The market was broken: people on fault lines and beachfronts were stuck either paying far too much for their insurance or with no real coverage except the vague and corrupting hope that, in a crisis, the government would bail them out. A potentially huge, socially beneficial market was moments from birth. All it needed was a push from nature. And so on Aug. 24, 2005, John Seo was waiting, waiting for a storm. And here it came.

Wall Street is a machine for turning information nobody cares about into information people can get rich from. Back when banks lent people money to buy homes and then sat around waiting for interest payments, no one thought to explore how quickly homeowners would refinance their mortgages if interest rates fell. But then Wall Street created a market in mortgage bonds, and the trader with better information about how and when people refinance made a killing. There's now a giant subindustry to analyze the inner financial life of the American homeowner.

Catastrophe bonds do something even odder: they financialize storms. Once there's a market for cat bonds, there's money to be made, even as a storm strikes, in marginally better weathermen. For instance, before the 2005 hurricane season, a Bermuda cat-bond hedge fund called Nephila found a team of oceanographers in Rhode Island called Accurate Environmental Forecasting, whose forecasts of hurricane seasons had been surprisingly good. Nephila rented the company's services and traded bonds on the back of its reports. ''They kind of chuckle at what we do,'' says a Nephila founder, Frank Majors. ''The fact that we're making $10 million bets on whether Charley is going to hit Tampa or not. It made them a little nervous at first. We told them not to worry about what we're going to do with the information. Just give it to us.''

As Katrina bore down on New Orleans, a cat bond named Kamp Re, issued by the insurance company Zurich, was suddenly at risk. If Zurich lost more than $1.2 billion on a single hurricane in about a two-year period, investors would lose all their money. If Zurich represented about 3 percent of the U.S. insurance market -- that is, it was on the hook for about 3 percent of the losses -- a hurricane would need to inflict about $40 billion in damage to trigger the default. Since no event as big as this had ever happened, it was hard to say just how likely it was to happen. According to R.M.S., there was a 1.08 percent chance that Kamp Re bond holders would lose all their money -- assuming the scientists really understood the odds. The deal had been a success. One of its biggest buyers was John Seo.

As Katrina spun, the players in nature's casino gathered around the table. When the storm jogged east and struck not New Orleans directly but the less populated, and less wealthy, coastline between Louisiana and Mississippi, they all had the same reaction -- relief -- but Hemant Shah felt a special relief. Shah is one of the founders of R.M.S., and he was at that moment driving to catch a flight from San Francisco to New York, where he hoped to speak at a conference devoted to predicting terrorism. When he saw Katrina miss New Orleans, he said to himself, O.K., it's big, but it's not catastrophic, and he boarded his plane.

As he flew across the country, R.M.S. and its competitors replicated Katrina inside their computers in much the same way that Karen Clark had once replicated Hurricane Andrew. Just hours after landfall, all three firms sent clients in the insurance industry their best estimates of financial losses: R.M.S. put them at $10 billion to $25 billion; Eqecat called for a range between $9 billion and $16 billion; Clark's A.I.R. had a range of $12.7 billion to $26.5 billion. Big, as Shah said, but not catastrophic. Traders who had underwritten Kamp Re took calls from an investor at a Japanese bank in London. Cheered by Katrina's path, the fellow was looking to buy some Kamp Re bonds. The traders found another investor eager to unload his Kamp Re holdings. The London investor bought $10 million of Kamp Re at a price of $94.

John Seo just watched. For the past four years, he and his brothers had made money at such moments as this: ''live'' cat trading, it's called. A few investors would inevitably become jittery and sell their cat bonds at big discounts, what with the Weather Channel all hysteria all the time. (''The worst place to go if you're taking risks,'' says one cat-bond investor, ''is the Weather Channel. They're just screaming all the time.'') But entering the 2005 hurricane season, the Seo brothers had reconsidered their habit of buying in a storm. ''The word had gotten out that buying in the storm was the smart thing to do,'' Seo says. ''And we were afraid our past successes would give us an irrational interest in buying. Everything's all fuzzy in these events. And when things are fuzzy, your brain gives you an excuse to push the envelope. So we adopted a policy, before the season, of staying out of the market.''

A few hours later, Hemant Shah's plane landed in New York. Shah turned on his BlackBerry and discovered that the New Orleans levees had broken: much of the city would soon be underwater. ''My first reaction,'' Shah says, ''was, Uh-oh, we have a problem.'' In the imaginary 100,000-year history of hurricanes that R.M.S. had in its computers, no hypothetical storm that struck so far from New Orleans had ever caused the levees to fail. The models, like the intuition they replaced, had a blind spot.

The Kamp Re bonds collapsed, the price dropping from the mid-90s to the low 20s. A few weeks later, an announcement from Zurich American made it clear that the investors in Kamp Re wouldn't be getting any money back, and Kamp Re's price fell from $20 to 10 cents. But then the real trouble started: R.M.S., the modeling company, declared that it was rethinking the whole subject of hurricane risk. Since 1995, scientists had noted a distinct uptick in hurricane activity in the North Atlantic Basin. The uptick had been ignorable because the storms had not been making landfall. But between July 2004 and the end of 2005, seven of history's most expensive hurricanes had struck the American coast, leaving behind 5.5 million insurance claims and $81 billion in insured losses. The rise in hurricane size and frequency was no longer ignorable. R.M.S. convened a panel of scientists. The scientists agreed that unusually warm sea-surface temperatures were causing unusually ferocious and frequent storms. The root cause might be global warming or merely the routine ups and downs of temperatures in the North Atlantic Basin. On cause they failed to agree. On consequence they were united. At the beginning of August 2005, R.M.S. had judged a Katrina-size catastrophe to be a once-in-40-years event. Seven months later, the company pegged it as a once-in-20-years event. The risk had doubled.

It had been just 13 years since Karen Clark's model swept the industry, but the entire catastrophe risk-taking industry now lived at the mercy of these modelers. The scientists were, in effect, the new odds-makers. It was as if the casino owner had walked up to his roulette table, seen a pile of chips on 00 and announced that 00 would no longer pay 36:1 but would henceforth pay only 18:1. The agencies that rated the insurance companies -- S & P, Moodys, etc. -- relied on the scientists to evaluate their exposure. When the scientists increased the likelihood of catastrophic storms, S & P and Moodys demanded that the insurance companies raise more capital to cover their suddenly more probable losses. And so in addition to the more than $40 billion they had lost in Katrina, the insurance companies, by edict of the ratings agencies, needed to raise $82 billion from their shareholders just to keep their investment-grade rating. And suddenly they weren't so eager to expose themselves to losses from hurricanes.

John Seo felt differently. Katrina had cost him millions. But at the same time, in a funny way, it had vindicated his ideas about catastrophe. He had lost only what he had expected to lose. He had found an acceptable mode of failure.

As a boy, John Seo learned everything he could about the Titanic. ''It was considered unsinkable because it had a hull of 16 chambers,'' he says. The chambers were stacked back to front. If the ship hit something head on, the object might puncture the front chamber, but it would likely have to puncture at least three more to sink the ship. ''They probably said, What are the odds of four chambers going?'' he says. ''There might have been a one-in-a-hundred chance of puncturing a single chamber, but the odds of puncturing four chambers, they probably thought of as one in a million. That's because they thought of them as independent chambers. And the chambers might have been independent if the first officer hadn't gambled at the last minute and swerved. By swerving, the iceberg went down the side of the ship. If the officer had taken it head on, he might have killed a passenger or two, but the ship might not have sunk. The mistake was to turn. Often people associate action with lowering risk or controlling risk, but experience shows more often than not that by taking action you only make the risk worse.''

The Titanic offered another lesson for the investor in catastrophe: the threats that seem to us the most remote are those we know the least about. Catastrophe risk is fundamentally different from normal risk. It deals with events so rare that experience doesn't help you much to predict them. How do you use history to judge the likelihood of a pandemic killing off 1 in every 200 Americans? You can't. It has happened only once. (The Spanish flu epidemic of 1918.) You lack information. You don't know what you don't know. The further out into the tail you go -- the less probable the event -- the greater the uncertainty. The greater the uncertainty, the more an investor should be paid to live with it.

The financial markets, or, at any rate, the arcane corner of Wall Street that dealt exclusively with highly unlikely financial events, had figured this out. The traders who sold insurance against extreme market collapses -- the tail risks -- all tended to charge exactly the same price, between four and five times their expected losses. Expected loss could be defined like this: Say an investor wanted to buy $1 billion of insurance for a year against a once-in-100-years stock-market crash. The expected loss would be 1 in 100, 1 percent of $1 billion: $10 million. The insurance would thus cost $40 million to $50 million. The pattern held across Wall Street. The trader at Lehman Brothers who priced stock-market-crash insurance didn't know the trader at Harvard Management who priced the insurance against drastic interest-rate changes, and he didn't know the trader at O'Connor and Associates who priced the insurance against the dollar's losing a third of its value. But their idea of a fair premium for insurance against financial disaster suggested they were reading the same books on the subject -- only there were no books. ''The reigning theory is that the taste for risk is as arbitrary as the value of a painting,'' Seo says. ''But if this is so, why are these preferences so consistent across markets?''

Seo thought, Maybe risk is not like art. Maybe there is some deep rule that governs it. And maybe the market is groping its way to that rule all by itself.

Intuitively what the market was doing made sense. Highly improbable events were especially unsettling. The person who insured others against an unlikely event faced not only the problem of judging its likelihood; even if he knew how often it would occur, he didn't know when it would occur. Even if you had complete certainty that a U.S. stock-market crash happened just once every 25 years, you still didn't know which year. If you had set up a business to sell crash insurance in January 1987, you would have been bankrupted by the crash in October; on the other hand, if you had gone into the business in 1988, you would have gotten rich. There was no justice in it. The catastrophic risk-taker was a bit like a card counter at the blackjack table allowed to play only a few hands: yes, the odds are in his favor, but he doesn't always get to play long enough for the odds to determine the outcome.

The uncertainty in these extreme, remote market risks meant that the person who took them should be paid more to do so. But how much more? Extreme events were treated on Wall Street as freak outliers that bore no relation to other, more normal events. There was a striking consistency in the pricing of these risks across Wall Street, but there was no hard logic under them: it was all being done by feel.

The logic is what Seo stumbled upon back in 2000 at Lehman Brothers after someone handed him a weird option to price. An industrial company had called Lehman with a problem. It operated factories in Japan and California, both near fault lines. It could handle one of the two being shut down by an earthquake, but not both at the same time. Could Lehman Brothers quote a price for an option that would pay the company $10 million if both Japan and California suffered earthquakes in the same year? Lehman turned to its employee with a reputation for being able to price anything. And Seo thought it over. The earthquakes that the industrial company was worried about were not all that improbable: roughly once-a-decade events. A sloppy solution would be simply to call an insurance company and buy $10 million in coverage for the Japanese quake and then another $10 million in coverage for the California quake; the going rate was $2 million for each policy. ''If I had been lazy, I could have just quoted $4 million for the premium,'' he says. ''It would have been obnoxious to do so, but traders have been known to do it.'' If either quake happened, but not both, he would have a windfall gain of $10 million. (One of his policies would pay him $10 million, but he would not be required to pay anything to the quake-fearing corporation, since it would get paid only if both earthquakes occurred.)

But there was a better solution. He needed to buy the California quake insurance for $2 million, its market price, but only if the Japanese quake happened in the same year. All Seo had to do, then, was buy enough Japanese quake insurance so that if the Japanese quake occurred, he could afford to pay the insurance company for his $10 million California insurance policy: $2 million. In other words, he didn't need $10 million of Japanese quake insurance; he needed only $2 million. The cost of that was a mere $400,000. For that sum, he could insure the manufacturing company against its strange risk at little risk to himself. Anything he charged above $400,000 was pure profit for Lehman Brothers.

And that was that, except it wasn't. He saw something. Each risk by itself was not unusual: the quakes being insured against were once-a-decade events. But since each earthquake had a 1-in-10 chance of happening in a year, the chances that both of them would occur were far more remote: 1 in 100 (10 percent of 10 percent). When you combined these more ordinary risks, you simulated extremely unlikely ones. ''What I noticed, after the fact, is that this exotic option's price was special,'' he says. ''It was related to tail pricing.'' The risk of catastrophe wasn't some freak outlier with no connection to more mainstream risks. It bore a fixed relationship to those risks. Indeed, one way of thinking about natural catastrophes was as a combination of more likely events.

Thus the hunches of Wall Street professionals found vindication in Seo's arithmetic. The expected loss of the more ordinary risk of a single earthquake was $1 million (a 10 percent chance of a $10 million loss). The insurance cost $2 million, or twice the expected loss. The expected loss of the remote combined risk was $100,000 (a 1 percent chance of a $10 million loss). But the insurance cost $400,000: four times the expected loss. All those practical traders who were pricing tail risk at roughly four times the expected losses had been on to something. ''Here I saw the beginnings of a market mechanism that directly links 1-in-10-year risk pricing to 1-in-100-year risk pricing,'' Seo says. The intuitive reason that extreme, remote risk should be more highly priced than normal everyday risk was ''a happy agreement between human psychological perception and hard mathematical logic.''

Seo's math -- which soon left middle school for graduate school -- served two purposes: to describe this universal rule about the pricing of risk and to persuade investors that there was a deeper, hidden logic to investing in catastrophe. They could have some sense of what the price of the risk should be. It was an extraordinary idea: that catastrophe might be fair.

Then came Katrina. The reaction to the storm has put a fine point on Americans' risk disorientation. The single biggest issue in Florida's 2006 governor's race, for instance, was the price of insurance. The Republican, Charlie Crist, got himself elected on the strength of his promise to reduce Floridians' home-insurance rates by creating a state-subsidized pool of $28 billion in catastrophe insurance coverage. ''Florida took this notion of spreading this risk and turned it on its head,'' says one former state insurance commissioner. ''They said, 'We're going to take all this risk ourselves.' '' The state sold its citizens catastrophe insurance at roughly one-sixth the market rates, thus encouraging them to live in riskier places than they would if they had to pay what the market charged (and in the bargain, the state subsidized the well-to-do who live near the beach at the expense of the less-well-to-do who don't). But if all the models are correct, $28 billion might not cover even one serious storm. The disaster waiting to happen in Florida grows bigger by the day, but for a man running for governor of Florida, ignoring it is a political no-brainer. If he's lucky -- if no big storms hit in his term -- he looks like the genius who saved Floridians billions in catastrophic-risk premiums. If he's unlucky, he bankrupts Florida and all hell breaks loose, but he can shake down the federal government to cover some of the losses.

Louisiana's politicians are usually quicker than most to seize upon shrewd politics that generate terrible social policy, but in this case they could not afford to. Louisiana cannot generate and preserve wealth without insurance, and it cannot obtain insurance except at the market price. But that price remains a mystery. Billions of dollars in insurance settlements -- received by local businesses and homeowners as payouts on their pre-Katrina policies -- bloat New Orleans banks and brokerage houses. The money isn't moving because the people are paralyzed. It's as if they have been forced to shoot craps without knowing the odds. Businesses are finding it harder than ever to buy insurance, and homeowners are getting letters from Allstate, State Farm and the others telling them that their long relationship must now come to an end. ''I've been in the business 45 years,'' says a New Orleans insurance broker named Happy Crusel, ''and I've never seen anything remotely like this.'' An entire city is now being reshaped by an invisible force: the price of catastrophic risk. But it's the wrong price.

Insurance companies, John Seo says, are charging customers too much -- or avoiding their customers altogether -- instead of sharing their risk with others, like himself, who would be glad to take it. New Orleans, as a result, is slower than it otherwise would be to rebuild. ''The insurance companies are basically running away from society,'' he says. ''What they need to do is take the risk and kick it up to us.'' They need to spread it as widely as possible across the investment world and, in the process, minimize the cost of insuring potential losses from catastrophes.

But this, too, is happening. The people on Wall Street who specialize in cat bonds now view Katrina as the single most important thing that ever happened to their business: overnight it went from a tiny backwater to a $14 billion market, and it is now stretching and straining to grow. In March of this year, a single insurer, Allstate, announced its intention to sell $4 billion in catastrophe bonds. A $14 billion market is a trivial sum next to the half-trillion or so dollars that the insurance industry stands to lose from megacatastrophes and next to the additional trillions of dollars worth of property that has gone uninsured in the places most likely to be destroyed by nature, like California, because the insurance is so expensive. But there are all around John Seo signs of a shift in the culture of catastrophe. ''It has all the features of providential action,'' he says. ''It's like all the actions of man and nature serve to grow the cat-bond market.''

When Katrina struck and his Kamp Re bonds collapsed -- from $100 to 0 -- Seo was able to view his losswith detachment. The models had badly underestimated the risk, but it was in the nature of extreme risk that the prediction of it would sometimes be mistaken. ''The important thing is that the money wasn't lost in an unearned manner,'' he says, by which he means that it wasn't lost dishonestly or even unwisely or in what his community of investors would consider a professionally unacceptable manner. Investors will endure losses as long as they come in the context of a game they perceive as basically fair, which is why they don't abandon the stock market after a crash. ''That's all I need to know,'' Seo says. ''That's all my clients need to know.'' Actually, he goes even further: ''I would be embarrassed if we had a big event and our loss wasn't commensurate with it. It would mean that we didn't serve society. We failed society.''

Seo's returns in 2005 were only slightly positive, compared with the roughly 10 to 12 percent he had been delivering, but the demand for his services boomed. He now controls $2 billion, or more than twice what he had before the most costly natural disaster in history. Big investors weren't scared off by Katrina. Just the reverse. It has led many of them to turn to Seo and others like him to make money from catastrophe. And they probably will. But what interests Seo more is what might happen in the bargain, that the financial consequences of catastrophe will be turned into something they have never been: boringly normal.

Michael Lewis is a contributing writer. The paperback edition of his book ''The Blind Side: Evolution of a Game'' will be published next month.

Pat and Stick's: Ice little earner

Sun, 24 Aug 2008 10:26:18 GMT

http://www.smh.com.au/news/good-living/ice-little-earner/2006/02/06/1139074143859.html

A common passion for beer and frisbees led to a new take on ice-cream sandwiches, writes Jacqui Taffel.

At first sight, Pat Monnot and "Stick" Seach are the classic odd couple. Monnot is short and roundish. Seach is tall (203.5 centimetres) and thin. Monnot is the excitable American go-getter, Seach the laid-back Aussie.

However, their similarities far outweigh the differences. For a start, they are co-owners of Pat and Stick's Homemade Ice Cream Co., purveyers of handmade, gourmet ice-cream sandwiches "since 2004".

Flavours include Vanilla Lace, Amaretti Espresso and Mango Fandango, with the occasional seasonal quirk such as the Valentine sandwich featured on today's Good Living cover (cinnamon and hazelnut ice cream between chocolate biscuit).

Beer and frisbees, not ice-cream, cemented the friendship when the pair met at a party six years ago. "He had an armful of beers so I knew immediately that I liked the guy," says Seach. Monnot, in turn, saw someone he immediately wanted on his ultimate frisbee competition team. "All he had to do was stand there with his hand up."

Every Saturday afternoon for two years they brewed beer and played frisbee until they both graduated with similar degrees (Monnot in computer science, Seach in computer engineering) and real life began to interfere. They soon discovered they had something else in common: they both hated computers and their jobs.

Monnot, a native of Minnesota who put himself through college working as a chef, remembered an idea he had when he arrived in Australia 10 years earlier - to make American-style gourmet ice-cream which at that time wasn't big here. He even went back to the US to do a commercial ice-cream-making course, but by the time he was ready to go, local brands such as Serendipity and Nice Cream had moved into the niche he had dreamed of filling. A computing degree seemed more sensible.

Then he and Seach came up with another idea. "We had to do something different," says Monnot, "and no one was making ice-cream sandwiches, except the crappy chocolate wafer ones with cheap ice-cream."

Seach had just finished a work contract, Monnot chucked his job managing a call centre and they vowed to spend the summer making ice-cream, working in their own kitchens at home.

The first batch, made in a square cake tin with ice-cream spread between two layers of brownie, was a disaster. Monnot's then wife suggested the round biscuits. Seach's dad, an engineer, came up with a key piece of sandwich-making equipment (it remains a trade secret). Monnot experimented with flavours, a friend designed the logo and finally they were ready to take their sandwich to the people. First stop: Balmain markets. The response was immediate, says Seach.

"The first week I sold pretty well. The second week I sold out completely."

In March last year they moved into a commercial space in Leichhardt and began selling through delis and cafes as well as markets. It was cheaper to work from home, with no overheads, but sharing his kitchen with three housemates was driving Monnot insane (presumably they weren't crazy about the arrangement either).

Though the business has started to pay for itself, it's still very much a labour of love, with the two friends still reliant on the kindness of girlfriends and parents to make ends meet. Seach's mother, Yolanda, confesses she was "apprehensive" when she first heard the idea, but was won over, like many of her son's customers, after tasting the product.

In the interests of research, this writer sampled several flavours including Vanilla Lace, Double Chocolate, Caramel Pecan and Strawberry Shortbread and can confirm that the most frequently used adjective was "yum".

At about $5 a pop, they're not cheap, but the sandwich construction process is hugely labour-intensive, from

cooking up the various ice-cream flavour bases to baking the cookies to stir-freezing the ice-cream to wrapping each sandwich.

After this manual effort, the partners go out to sell the result each week at different markets. They get one day a week off if they're lucky.

It's been exciting and nerve-racking. "I still can't sleep," says Monnot, but so far no regrets. Monnot is living his ice-cream dream and Seach has vowed never to return to corporate life. "I like working for me."

Despite the alluring range of flavours, Pat and Stick's biggest seller is the one that sells best all over the world: vanilla.

How rich breeders shaped the world

Sun, 17 Aug 2008 11:48:24 GMT

http://business.smh.com.au/business/how-rich-breeders-shaped-the-world-20080815-3wce.html?page=fullpage#contentSwap1

August 16, 2008

Why do some nations get rich while others stay poor? What are the magic conditions that have to be present before an economy can achieve take-off and start growing rapidly?

These questions have puzzled and fascinated development economists, economic historians and officials in international economic agencies for many years. If they're to tell the world's poor countries how to achieve economic development, they need to know the answers.

In recent years several authors have come up with new - but conflicting - explanations of how and why some nations get rich. Some argue that countries in temperate climates are more likely to grow than those in the tropics. Some credit differing colonial policies, while others stress that landlocked countries have trouble achieving lift-off.

But no one's explanation is more startling than the one proposed by Gregory Clark, a professor of economics at the University of California, Davis, in his book, A Farewell To Alms: A Brief Economic History Of The World, published by Princeton University Press and distributed in Australia by Footprint Books.

Clark has been visiting Australia and he summarised his theory on the ABC Radio National program Perspective.

As everyone knows, the first country to start getting rich in a hurry was England with its industrial revolution, which Clark dates from 1800.

Because England at that time had both political stability and free markets, the long-standing conventional wisdom among mainstream economists is that these are the necessary pre-conditions for economic development.

The key idea is that free markets create the right monetary incentives for people to work hard, display enterprise and pursue innovation.

This is part of the rationale for the "Washington Consensus" - the economic prescription that Washington-based agencies, such as the International Monetary Fund, the World Bank and the US Treasury, urge on troubled developing countries.

It advocates such things as legally secure property rights, market-determined interest rates, a competitive exchange rate, reduction of barriers to trade and foreign investment, budgetary discipline, deregulation and privatisation.

But Clark disputes the belief that the industrial revolution ignited in England in 1800 because of good economic incentives. This "happy conclusion" - which just happens to confirm the correctness of conventional economic theory - stems from an ignorance of history, he says.

England in 1800 had good economic incentives, it's true. "But medieval England had even better ones," he says. "Medieval England was as incentivised as Thatcher's England. Tax rates averaged 1 per cent. Property rights were secure. Violence was limited. Social mobility was extensive."

Yet, like all societies before 1800, medieval England achieved no growth. (That's a point to note: before the industrial revolution, no country had ever achieved economic growth and rising living standards.)

So what was it that sparked the industrial revolution? Clark argues it came from an evolutionary process of natural selection he calls "survival of the richest".

Capitalist attitudes and economic growth triumphed in England because those who succeeded economically took over the population by biological means.

The modern English are the descendants of the most economically enterprising people of the pre-industrial world, those who prospered. "The poor, the slackers, the spendthrift disappeared."

This is how the process worked, according to Clark. The average Briton in 1800 ate only as much as the hunter-gatherers did. Life expectancy at birth was close to the 35 years found for hunter-gatherers.

Height is a good measure of nutrition and health. Men in England averaged 67 inches (170 centimetres), the same as European males in the Stone Age.

Foragers satisfy their material wants with small amounts of work. But the modest comforts of the English in 1800 were purchased only through unrelenting drudgery.

There was the rich upper class of Jane Austen novels. But their wealth was more than counterbalanced by the stinted life of the masses. The vast majority of people would have been better off transferred to a hunter-gatherer band.

In this subsistence world, the average man could have only two surviving children. Within that average, however, prosperous Englishmen were survived by four or more children, whereas labourers left fewer than two and, among the poorest, more than a third left no children.

So economic success translated powerfully into reproductive success. But, without economic growth, this meant pre-industrial England was a world of downward mobility. The superabundant children of the rich were compelled down the social hierarchy to find work. Craftsmen's sons became labourers, merchants' sons became petty traders.

This meant personal attributes that later would ensure economic dynamism - patience, hard work, ingenuity and education - spread through all ranks of society by biological means. The rich outbred the poor.

The "survival of the richest" in England was accompanied by the triumph of middle-class preferences. From 1200 to 1800, interest rates fell, work hours increased and the taste for violence declined. Numeracy and literacy spread even to the lower reaches of society.

So, by 1800, though the economic incentives were no better than before, producers innovated vigorously.

And though "survival of the richest" was strongest in pre-industrial England, the process was at work, at differing rates, in all stable, settled pre-industrial societies. Modern preferences and culture in all long-settled societies - such as China, India and Japan - have been shaped by this process.

We're used to thinking of people shaping economies, but Clark is arguing that the economy also shapes people. Get this: "We are adapted to capitalism. We differ culturally and genetically from our forebears of the Stone Age," he says.

What does this mean for the modern world?

"Some societies had little experience of such a pre-industrial regime. Some even went straight from foraging to the modern economy, as Australian Aboriginals did in 1788.

"These societies have historically rooted disadvantages in competing in a capitalist world. Their response to market incentives can be limited. This may explain the extraordinary difficulty forager groups such as Australian Aboriginals have had in successfully incorporating into capitalism."

By contrast, the colonial era saw thousands of desperately poor Chinese and Indian labourers, with little education, dispersed across the globe and settled among local populations with a much shorter experience of settled agriculture, such as Fiji and Malaysia.

"In all these societies, without any initial wealth or political advantage, the Chinese and Indians dominated the commercial economy and became the business class," Clark says.

But a reader warning: Clark admits in his book that his ideas are highly controversial. "Doubtless some of the arguments … will prove over-simplified, or merely false. My hope is that, even if the book is wrong in parts, it will be clearly and productively wrong, leading us toward the light."

Ross Gittins is the Herald's economics editor.