The First Snowfall

This will be a shameless plug.  However, just maybe an example will also show why I think insurance can be so interesting!

The first snow hit Lake Tahoe this week.  That's good news.  Why?  Everyone begins to worry about winter.  That's where my new company comes in, and why this is a shameless plug.

[Don't forget the disclaimer: I am not advising you on insurance or derivatives transactions.]

Most people I know will very soon cut a deal with their landscaper to plow their walks and driveway.  Your landscaper charges you one of two ways.  Either a fixed price for the whole season, or a variable price based on how much it snows.

With a fixed seasonal contract, if it snows very little, you feel ripped off, and your landscaper has a windfall for no work.  If it snows too much, you have a windfall, if your landscaper actually clears your driveway for that tenth blizzard of the year.  Only in a narrow band of snowfall do you both feel "okay". 

The per event or per inch contract is just as bad.  You have no idea how much you'll have to pay.  Your landscaper (if he's like my kids) sleeps with his pajamas inside out with pennies on the windowsill all winter, hoping he can pay his mortgage.

In fact, the seasonal contract you bought amounts to buying insurance against snowfall from a guy whose primary systematic risk in his life depends on snowfall.  By design, you have to overpay him for this.  If you go with the variable cost, you have potentially massive budget uncertainty.  (This is exactly like my past discussions about why you cannot hedge the ultimate financial disaster!)

"Massive" could be an exaggeration for you personally, but for plenty of businesses, it matters.  Imagine you have a really big driveway--more like a parking lot.  You must keep it clear at all times.  You get the idea.

You wouldn't buy car insurance from your landscaper, so why do you buy weather derivatives from him?

So, what do you do?  You need a third party.  Ideally, this third party understands snowfall risks, but doesn't really care much.  They take lots of different risks.  Your bit of snow matters little.  That's where insurers come into the picture.  As much as people love to hate insurance companies, they're in business to bear risk the rest of us cannot take.

Insuring Diamonds

It's not a Diamond As Big As The Ritz, but it's pretty big...

In case you haven't noticed, Costco is selling a $1 million diamond ring.  There's only one.  I assume, yes, you get the cash back at year end.  In this link, you can see the GIA certificate.  More interestingly, in this link they provide you the appraisal for the ring.

Why is that interesting?  They're selling you a diamond for $1 million, and giving you an appraisal for $1.496 million.  Anyone who has ever bought a diamond knows they can get an appraisal to say anything they want, within reason.  That's because insuring jewelry is very profitable business--as long as appraisals run substantially above the cost of the jewels.  Notice that appraisal says "This report is for insurance."

(Anyone spending this much on a clump of crushed charcoal should be willing to absorb the risk of loss without insurance!)



You want to insure that diamond?  Great, insure it for $1.5 million, even though it is a $1 million diamond.  Guess what? You're insurance policy replaces the diamond, it doesn't pay you cash.  If you want to insure your Mazda for the value of a Maybach, you can do that too.  It doesn't make you richer.  And, when you total your car, your insurer makes you whole with a replacement Mazda...less depreciation.

 

[Note my new probably required disclaimer: I am not providing you advice on buying insurance.  Nor am I offering to sell you insurance on anything!]

Unreasonable Claim of the Week

There's a standard strategy in emerging markets hedge fund investing that too many investors seem to be willing to tolerate: Go long emerging markets equities, which are viewed as "long term attractive" at the same time as they tend to be very "risky", and "hedge" with developed markets positions with better liquidity.

Think that sounds silly?  Think that sounds like your front airbags deploying when you're hit from the side?

In a story from Pension and Investments on emerging markets investment strategy we hear from the experts:

PIMCO limits losses in its [emerging markets] strategy at 30% — or 1.5 standard deviations from the long-run average volatility in emerging markets equity of 20% — but doesn't give up any returns to do so, Ms. Gordon  [executive vice president and lead portfolio manager in emerging markets equity at PIMCO in London] said. “You're not giving up upside; you're capping downside,” she said.

That's because PIMCO looks for the cheaper ways to hedge against major losses. One example is the Australian dollar: AUD options won't hedge against minor performance bumps in the road, “but it is an asset that correlates with a rise in risk aversion in a global meltdown,” Ms. Gordon said.

Translation?  PIMCO doesn't actually limit losses at 30%, and PIMCO does limit upside.  Instead of buying high expected return emerging markets equities, they buy hopefully correlated, liquid, cheap and low expected return stuff that they think might have high returns if emerging markets crash. 

For you home chefs, here's a recipe for your own emerging markets hedge fund:

Start with $100,000:

• Buy $50,000 of EEM, the iShares Emerging Markets Index ETF.
• Pick three emerging markets countries or regions you think are cool places you'd like to visit that have single country ETFs.  Looking for inspiration?  Here's a list.  Invest $10,000 in each three.
• Buy $2,000 worth of three month, 30% out of the money puts on the S&P500.  (That means you own the right to sell the S&P500 at a price 30% below where it is the day you buy, for about three months.)
• Every month, buy more of the options the same way, and rebalance your long positions to 50% EEM, 10% each of your three hot picks.

If you are successful, please send 2% management fees, and 20% performance fees.

Groupon Commercial Finance

On a recent night out to dinner with friends, I had an argument with our companions, (pretty standard behavior on my part, actually,) that Groupon deals are a bad investment.  Today's WSJ story about copycat problems for Groupon makes me even more concerned.  Not surprisingly, huge numbers of competitors in the Boston area have sprung up. 

After purchasing my first Groupon deal, (to Fascino Restaurant in Montclair, NJ, which we enjoy several times a year,) it hit me that Groupon and it's race to the bottom competitors act as completely unregulated finance companies, issuing junk bonds and credit guarantees on those same junk bonds.  Groupon might be the worst financial guarantee insurer ever designed.

[DISCLAIMER: One reason I have not written much lately is that I am in the middle of setting up an insurance company over which I will exercise control.  This officially means I cannot risk advising anyone about anything insurance related until we have completed licensing.  Therefore, let me be very clear!  I am not providing anyone insurance advisory services, attempting to sell insurance or anything like that!]

How does Groupon Financial Guaranty (GFG) work? 

Imagine you own a restaurant. 

You are broke.  I know this because my wife's family business for god knows how long was restaurant and bar equipment and supplies.  Three generations of her family can confirm you are broke!

Virtually all restaurant owners are broke, even the really good ones with multi-million dollar revenues. 

You figure that GFG can help you raise some working capital and get great advertising at the same time.  How? Hundred dollar Groupon deals!  Sell $100 of food today for $50.  You receive $25 today (the underwriter and guarantor of the coupon keeps the other $25) with the obligation to pay off $100 at some time in the next year, when the coupons expire.

Maybe at Applebee's or McDonald's you don't lose money with a 75% discount on the food alone, but with your labor costs and higher cost food, you are definitely losing here.

You argue, however, that the coupon makes good sense.  It amounts to good advertising, getting your name in front of thousands of people who will become customers.  GFG clients who carefully track this information will tell you that you are wrong.  GFG raises capital from loan sharks (i.e. people willing to lend for an incredible deal and don't come back,) or your current customers who would have paid anyway.  (Sorry, Fascino!) 

Here's my scenario for what's really happening to you.  Your restaurant cannot make payroll, (that's why Town, above, went bankrupt!) No bank will lend you money.  So, you'll borrow from GFG to make payroll.  You'll rationalize. Late August is always slow--everyone leaves town!  Business will pick up in September.  

By September, business starts to pick up.  Coupons are rolling in!  Expenses rise dramatically as you're buying more food, and face more spoilage because you cannot predict customer flow as you had in the past.  Worse, your waitstaff is storming the Bastille because customers aren't tipping on the full price.  You know you're not making any money. 

By the second week of October, you're out of business because two waiters quit, but you couldn't make payroll anyway.  Only 250 of the 1000 you sold made it to the restaurant.

You may be out of business, but you're not a public company with shareholders.  GFG holds the risk on those coupons: They have to save their reputation.  GFG just lost $18,750.  (They need to refund $50 on 750 coupons, but on those coupons, they only made $25 each.)  

Sure, this won't happen every time, but it will.  Someone who understands accounting better than I do, please explain: Where on Groupon's balance sheet are the credit loss reserves?

Money Market Deja Vu

Almost one year ago, I wrote about the deception of money market funds.  Money market funds were under serious scrutiny then, because their manipulated price of $1 makes them appear to be less risky than they really are.  One year ago, the mutual fund industry refused the idea of letting money market funds vary around $1.  Why reveal that these investments that look like bank deposits actually have risk?

Today, the Investment Company Institute came back with a new suggestion: Set up a new "bank" that stands prepared to buy assets from money market funds when they cannot meet the liquidity demands of their investors.  Again, we're talking about making a risky investment look not risky.

Why is this called a bank??  Two very good reasons.  First, money market funds aren't bank deposits.  Bank deposits are secured, at least in theory, by FDIC insurance.  So, if money market funds could say their investments are "protected by a bank" it will make them sound less risky, right?  Second reason to call this "beast" a bank?  This beast is a financial guaranty company, and if there's one thing we've learned from the financial crisis, it is that financial guaranty companies don't work in a time of massive systematic shock!  (Here I talk about this problem more generally.)  So, let's call it a bank instead of an insurance company.

However, the real question remains: Why would we, the public, want to establish a financial institution that cannot possibly cover its own risks in a serious financial crisis, so that the mutual fund industry can more effectively hide the risk of money market funds?

Can I Buy Audit Insurance Too?

Here's a funny one: Lexington Insurance, a division of Chartis, (the company formerly known as AIG,) has recently announced they'll provide insurance guaranteeing the payment of low income housing tax credits. 

Get it?  You can buy, from a company controlled by the Federal Government, an insurance policy protecting you in the event the government doesn't want to pay you money you think you are owed!

This sounds a lot like the old K&R problem: Kidnappers don't have much success collecting ransoms unless those kidnapped actually carry insurance.  Call it greasing the skids of an inefficient market.  However, doesn't that make the insurance company complicit in the crime?

More importantly, how much do I pay AIG to make sure I don't get audited?

Moody's, S&P, Fitch and Wine Spectator

Here's the text of an email I received moments ago:

Dear customer,

our web team made a mistake in today's nl by putting a rating of 96 points for Gournier.

The wine was not rated by wine spectator and we sincerely apologize for the inconvenience.

If anyone has place an order based on the rating and would like to cancel it, please email us or call us.

Once again sorry for the inconvenience.

Thanks,
Wine Dept,
973-992-4441.

You see where I'm going with this?  Let me rewrite the email:

Dear Customer, 

We put a worthless, actually, non-existent rating on a security you bought.  If you are willing to admit that you made a completely ridiculous investment decision based on subjective ratings that you did not understand, and have no ability to evaluate, then we'll buy the security back from you.  No questions asked!  We're here, please call!

Thanks, Your Ratings Agency

Hmmm...nice thought. Then again, my "long time" readers know I'm no fan of the buy-back guarantee.  (C'mon read that one...It's one of my first, but favorites!)  Making ratings agencies into insurance companies would be complicated and painful.

We Are All Tony Hayward

In case you've been under a rock, or an oil slick, Tony Hayward is the embattled head of BP.  And no, I am not about to attack you and your carbon footprint or personal oil consumption.

Richard Epstein writes in the Wall Street Journal yesterday that BP should not have liability caps:

A tough liability system does more than provide compensation for serious harms after the fact. It also sorts out the wheat from the chaff—so that in this case companies with weak safety profiles don't get within a mile of an oil derrick. Solid insurance underwriting is likely to do a better job in pricing risk than any program of direct government oversight. Only strong players, highly incentivized and fully bonded, need apply for a permit to operate.

Basically, if you have everything to lose, you act more responsibly, and you buy more insurance.  (And, your non-"catastrophic loss scenario" return on equity falls.)

In seemingly unrelated news, the GAO released its latest report on individual state natural catastrophe programs.  (Here's the summary, and the full report.)

For me, the highlight of the report: Florida's hurricane programs cover $2 trillion of risk.  Yes, that's trillion, not billion.  I am not making this up.  How do you imagine the state of Florida covers that risk?  You and your wallet.  I've written about this before, whether it's a special program to bail out all our high risk friends, or the lunacy of making the money losing National Flood Insurance Program cover hurricanes too.

So, Epstein argues that liability limits amount to free insurance.  If you know you can't pay out over some limit, then insuring about that limit comes at a price of zero.

Too many people will argue that without liability limits, or without free insurance from the government, "companies won't function," or "homeowners can't live."  That's just not true.

However, I have two questions that maybe I'll investigate further, and I'd love Epstein's thoughts:

• Why do we have limited liability companies because that too amounts to free insurance?
• How do you avoid private insurance and reinsurance companies becoming systematic-disasters-waiting-to-happen because, as I argue here and here, they cannot possibly hold capital to cover their risks?
  

Where's My Insurance Bailout?

In a previous post I wrote about the joys of HR 2555, which seeks to create a federal program to protect the voters who live in catastrophe prone areas.  Sponsored by a Floridian, logically.  This disastrous piece of legislation implies that it would allow for better risk sharing by introducing the government into the hurricane and earth quake insurance business.  Who foots the bill?  You, lucky readers, who don't live in those high risk areas will eventually pay the price for your fellow tax-payers folly.  Maybe they'll let you stay in the beach house for free?

The new kid on the block, HR 1264, sponsored by Gene Taylor, a congressman from Mississippi, seeks to allow the National Flood Insurance Program to sell hurricane insurance too.  Taylor failed to pass a bill he introduced after Katrina that would have allowed people to retroactively buy flood insurance from the federal government.  No, I did not make that up!  I hear the new commercials: "GEICO could save you fifteen percent or more, especially if you call shortly after an accident."

Panic Investing And Profiting From Disaster

Not long after Passover, it's nice to see the James Altucher in the WSJ attempting to help people profit from a nice list of several plagues.  I'm a fan of contemplating disaster.  Most friends think I spend too much time on the topic.  This piece stinks like rotting corpses after the death of the first born.

The first fundamental problem: Free insurance rarely exists.  Making money when something out of the ordinary happens, especially bad things, typically requires losing money when things don't go wrong.  Why?  I've written more about this here, but the basic idea follows because you want to insure against the vary same things others want to insure against, which means (a) you want someone else to hold risk you don't like and they probably don't like it either, and (b) your insurance requires your counter-party tie up capital waiting for the event. 

Second fundamental problem: He suggests public equity market hedges for all his risks.  Public equity markets, all prognostications aside, operate pretty darn efficiently.  This means two things: First, often equity prices reflect expected economic growth, in the broadest sense.  Second, equity prices reflect a risk premium, or how much investors will pay for a dollar of future earnings potential.  Neither of these factors really change in response to the ills of Altucher's world. Acute disasters don't matter in the long run.  Big, long run disaster expectations efficiently work their way into prices.

With those two warnings, let's look at his suggestions....

HR 2555...The Secret Health Care Bill?

HR 2555, the Homeowners' Defense Act of 2009, seeks to establish a federally backed risk pool for catastrophe exposed states.  The bill's sponsors (from Florida!) allege it will save money at the same time addressing the exorbitant insurance costs in several states.  Here's a summary.  This idea sucks...unless you live in Florida.  They think the market lacks risk pooling.  They're wrong.  The market, in Florida at least, lacks sense.

For most people, homeowner's insurance reflects unexpected events: accidental fire, theft.   For catastrophe prone areas, homeowners insurance reflects expected events with unknown timing.  Your homeowner's insurance on the coast in Florida must reflect the fact that your house will very likely be destroyed prior to the end it's useful life.  You may not live there, but your insurance company must prudently evaluate that risk, and reflect it in your price.

What the Bank of Dad Tells Us About Health Care

In this post, I discuss teaching our kids to save by paying them very high rates on their savings, deposits in the Bank of Dad, as we call them.

My anecdotal observations of children (particularly mine!) lead me to assume they discount the future rather severely.  Thus, a dollar right now has substantially greater value than a dollar tomorrow.  Several theories could explain these results.

I generally subscribe to the notion that discount rates (the relative value of a dollar tomorrow versus a dollar today) are not constant over our lifetimes. Therefore, in our household, we train our children to save by paying them higher returns on deposits, that encourage saving behavior that would not occur at the adult "market clearing" interest rates.  I'm pretty confident stating this applies to twenty somethings too.  I suspect those with the bulk of the wealth in the world drive market clearing discount rates.  That means people over the age of 40.

My Take On "The Looming Pension Disaster"

I could give you a list of a thousand problems on this topic.  I won't.  I'll pick one, maybe two.  I wrote a while back about the problem in New Jersey.  New Jersey hardly has a monopoly on pension problems.  Here's another nice one by Alan Sloan at Fortune.

In the FT today, there's a piece about securitizing pension risks. Before I tell you what the heck this means, I'll tell you it cannot work.  Too many regulatory problems.  The risk cannot be unloaded or hedged.  This all ties back to my moving and storage piece, (which, by the way, I will continue to link as frequently as possible, because if you haven't read it, you don't get half of what I'm saying!)

Securitizing pension risks means figuring out a way for another party to hold the risk that people live longer than expected.  Put another way, construct a security that allows large groups of people to hedge the risk that they live longer than expected.  Let's think about buyers of this security.

Give Well, don't Guide Star, and how to respond to Haiti

In this post, I propose hedging catastrophe risk in emerging markets via reinsurance transactions.  I argue it's cheap because most emerging market catastrophes are uncorrelated with developed market catastrophes, and they are small risks, relatively speaking.  I argue it's more efficient because it prevents crowding out of more effective, higher success rate development aid programs. (Let's be realistic: Search and rescue teams in Haiti are not "free" in any sense of the word.  Their cost per lives saved, unfortunately, is very high.  We'd save many more lives buying mosquito nets.)

This brings me to the Red Cross, and my suggestion to them.  Millions of people of generously texted their $10 to the Red Cross, a genuinely generous act.  However, they should know there is no guarantee most of these contributions go to Haiti.  I for one don't think that matters.  However, I'd imagine many of these contributors want their money to be for disaster relief.

What, in theory, could the Red Cross do?  They could take these contributions and buy catastrophe insurance on other potential emerging markets disasters.  They will very likely occur.  They will stretch the resources of the Red Cross and others.  They will crowd out longer term projects that may be substantially more cost effective.

Hedging catastrophic risk exposed foreign aid

Several days ago, I posted a comment here that talks about hedging foreign aid.

Most developing countries have very low insurance penetration.  This means, typically, if they suffer a catastrophic loss, their insurance recoveries amount to very little.  Developed economies can and should address this problem.

Reinsurance markets (these are the markets that serve insurance companies, not people) have developed many tools to sidestep what is called "follow the fortunes" doctrine.  This insurance practice says insurance may only pay off on actual losses.  Historically, anything else was referred to as "gambling" and would provide nasty incentives to those gamblers.  However, buyers of "insurance" even if they don't bear the risk of direct loss, are unlikely able to affect the severity of an earthquake, for example.

Why is this profit different from all other profits?

Let's look at bank profits.  As usual, we have to split this out between commercial banks and investment banks.

First, commercial banks.  The crowds gather with their pitchforks this week to express outrage at the profits earned by banks on the backs of the taxpayers.  What's new?  If you think bank profits haven't always depended on the support of taxpayers, you don't understand how the system works.

We The People place our money in banks.  Since the Depression (you know the Depression, as in "this is the worst financial crisis since the Depression",) when too many banks failed, we've had the FDIC.  FDIC "solved" the problem that banks fundamentally mis-match their assets and liabilities.  They borrow short (that is, take deposits from customers who can demand their cash at any time,) and lend long (that is, write mortgages and other loans that are longer dated assets.)  The existence of this mis-match creates the potential for bank runs: More depositors want their cash back than the bank can actually pay.  A run does not require that loans default.  A run only requires more people want their cash than the bank has cash.  FDIC insurance protects that risk.

In the "olden days" customers cared what their banks did with the deposits.

Attempting to prevent financial disasters is too costly

What does it mean to prevent financial meltdowns?  Suppose you could buy an insurance policy against a financial catastrophe.

Let's keep this very simple, for a concrete example.  Suppose you want to buy a binary security linked to GDP for one year.  Such a security pays the holder $1 if U.S. GDP drops by 10% or more in a calendar year, zero otherwise.  That's what we'll define as a financial meltdown.  The price of this security is the insurance premium for one year of financial disaster protection.

Suppose a household needs $1 million of this security to hedge their exposure to the risk.  This $1 million payoff presumably must cover (the net present value of) losses to financial assets, employment income, real estate, etc. if such an event occurs.

In addition, the buyer of the insurance must be confident that the provider of this protection will be able to pay off the $1 million if the event happens.  That's a serious concern.

Solving the financial crisis: Why is Step Three so difficult?

In my previous posts I propose ways to solve the banking regulation question, and the "investment banking" too big to fail question.  In this post, I'll begin to address the difficulty of insurance companies.

Insurance poses a significantly different problem than banks and investment banks.  Let's first agree what the insurance business is.  Insurance companies have huge piles of money (call this surplus) that they use to convince policyholders that when they have a claim against the insurer, the insurer will have enough cash (capital) to pay the claim.  As a result, policyholders hand over relatively small amounts of cash (premium) in exchange for a promise to pay under certain conditions (claims.)

At first you could imagine applying my same logic about banks to insurance companies.  Just make the insurance companies hold capital that meets the combined limits of all the risks they write.  That might work. 

What is the goal of corporate governance?

Jason Zweig, in the Intelligent Investor column in the Wall Street Journal writes about Lucian Bebchuk's research about CEO Pay Slice, (which you can find here.)

The most thought provoking comment in the paper is the following:

[CEO Pay Slice] is negatively correlated with the firm-specific variability of stock returns over time. This association could be due to a greater tendency of dominant CEOs to play it safe and avoid firm-specific volatility (which would impose risk-bearing costs on them but could be less costly to diversified investors).

Rarely does anyone take on the serious implications of this observation: CEOs and the Boards that oversee them must strike a balance between taking idiosyncratic risk that differentiates them from the rest of the marketplace and taking incremental diversifying risks that reduces firm specific volatility.

I served on the board of a public reinsurance company. Reinsurers take very risky bets by insuring, typically, catastrophic disasters. Catastrophic insurance has a particular type of risk I'll call short volatility: They collect insurance premiums and pay out very large claims. The claims are nowhere near normally distributed in the world of catastrophes. This means that writing "cat" reinsurance has very high returns on equity, although they aren't normally distributed. Also, cat reinsurers have ratings (A- or better, typically. See AM Best, for example.) This means they write protection on more risks than they can pay, because (re)insurance buyers accept a rating as evidence of ability to pay.

The first problem this raises for the Board is whether the board should be maximizing the expected return on equity of the company or maximizing the return to holding the stock of the company, or even maximizing the return on equity of the company subject to some limit on the risk of losing the rating and therefore destroying the enterprise value of the company.

At the time I served on the Board, I happened to also "control" more than 10% of the stock. However, that 10% of the stock was of little consequence to my firm's total risk. This gave me a serious conflict to address: As a Board member, what did I assume the shareholders of the company wanted me to do? I knew I was not necessarily a typical shareholder. Did I assume they held uncomfortably large blocks of stock, (which we all should view as irrational,) and therefore would want me to not risk the disaster of losing the rating? Was my goal to maximize the "value" of the rating, meaning the ability of the company to default on claims if something truly catastrophic happened, which is perfectly sensible if no one holds large positions in their own portfolio?

These are the interesting questions most boards, I suspect, spend too little time addressing.

Jewelry stores should be regulated by FINRA

My wife and I got engaged when I was an economics PhD student. As I recall, I was taking a class on principal agent problems (frankly, my favorite class from grad school, although the professor was ridiculously boring in class.) These are problems with asymmetric information. This area became very fashionable in the past two years, to say the least! I caved to peer pressure, and researched diamond buying. This seemed extremely interesting to a budding economist. Imagine a good which the buyer cannot value or even identify, that is purchased (more or less) once in a lifetime, from a semi-competitive middle man and a near perfect monopolist supplier. The possibilities are endless! After a little research, as best I recall, the only academic study of the diamond industry at the time was written by someone who mysteriously died. Very young.

One of the most striking features of the just passed Holiday Season, by which I mean Christmas, are the never ending jewelry store ads. Frequently the ones for diamonds feature a riff on the claim "...and [fill in the honorable retailer's name] will buy the stone back from you at any time for exactly what you paid!"

Think about this hypothetical transaction. This claim implies that the retailer stands ready, in the securities sense, to unwind every transaction they've ever made. The capital requirements to back this trade would be VERY large for the retailer. Why do our fine regulators allow these claims to continue??

In a technical sense, we could think about this as the retailer tying puts to every transaction. They are perpetual puts. There is a scenario where these perpetual puts work: A perfect monopoly. In a perfect monopoly, the monopolist controls supply to manage price fluctuations. There should be none because price fluctuations destroy value for the monopolist. Therefore, we can assume the monopolist manages supply to generate a stable real return, with no volatility. With no price volatility, and steady real return, the put has no value.

So, what's going on? My assumption is that the retailers, in conjunction with the near monopolist supplier of diamonds, wants to prevent (discourage??) owners of diamonds from selling them. To do this, they provide guarantees that they cannot possibly maintain, and the public accepts these guarantees at face value.

To me, this is financial fraud. Either the retailers don't have the capital to back the claim, or the retailer is a participant in a cartel. Bring on FINRA!