Should there be a Separation of Church and Street?

(DAYTONA BEACH, FL) - Editor's note - In a previous seminar we described an innovative financial product launched by a new investment bank called Divine Discount Deposits, Inc. (Triple-D, to Street insiders). Fronted by a former Wall Street legend, junk bond salesman and Editor of Catholic Week, and closely affiliated with the Vatican's fiscal agent, VatBancorp, S.A., the new firm recently unveiled an even more sophisticated financial derivative, first traded on the Australian Securities Exchange. It is known as the Vatican Insurance Default Swap (VIDS).

Lest it be assumed that the whimsical quote above sounds like political profiling, our intention was merely to point out that with its relatively modest population, in the sophisticated financial world of Southeast Asia, Australia is right on the money, with the ASX ranked fourth largest financial market in the Pacific. And with a high growth/low inflation economy, Australia's GDP is #14 in the world, and their financial Street (often called The Trail by arrogant Westerners) is just as adept at stock hustling, insurance fraud and sub-prime mortgaging as other cobbers are at winning distinction in literature, film making and the visual arts.

So it's not surprising that it was the Australian media that recently broke the news that triggered the new financial medium, beginning Down Under and then exploding on Wall Street.

According to the Australian Press, the reinsurance giant and Vatican Bank subsidiary known as Catholic Church Insurance, Societe Anonyme, (CCI to financial insiders) recently made the announcement that CCI maintains what's known as Swindler's List, a catalogue of high profile and high-risk priests, who are considered by CCI 's actuaries both too high-risk to insure and too big to bail, in the event of altar-boy rape or other class actions.

CCI, of course, is both owned by, and has as its principal client, the Vatican itself. The revelation on The Trail (home of the ASX) was followed by a brief statement by CCI actuaries to the effect that Swindler's List is an attempt to reduce the firm's liability horizon. The Vatican Bank as parent company, like all good parents, immediately took pains to inspire confidence among Catholics everywhere that the solid and ecclesiastical structure of the Church would not suffer as a result of The List because, in fact, such high-profile priests would continue to serve their parish communities worldwide, especially in the most important calling, the education of children. A special Papal Encyclical was issued, which read in part:

The CEO of CCI (Australia) Ltd. has agreed to issue a copy of Swindler's List, the Uninsurables, to the Australian Government's Royal Commission inquiring into Church abuse, provided they let it go at that and stop asking questions.

Reaction on The Trail was immediate but limited, compared with the melt-up that followed in New York. One or two Australian brokers shorted CCI's bonds, that sort of thing, but as usual it was the Americans who saw the profit potential by rolling out a new and exciting financial product known as Vatican Insurance Default Swaps (VIDS).

Before describing the new security, we should review Triple-D's previous activity. Three months ago, Pope (now Emeritus) Benedict XVI announced a new profit center for restoring Vatican revenues impacted by adverse publicity and disappearing parishioners. The centuries-old practice of selling indulgences, or guaranteed entry into Heaven, was reintroduced (it had been temporarily suspended in 1567). Benedict's initiative was cheered by the world's financial leaders, also interested in restoring their revenues impacted by adverse publicity.

I interviewed on CNBC at that time, the CEO of Triple-D indicated that the center piece among the innovative financial products offered by his firm would be After-Life Memberships, or ALMS. As packaged by Triple D, the basic unit sells at par or 100 (remitted to the Church, of course) while Triple D makes the market and acts as principal (98 bid, 102 asked, as this is written) or alternately acts as broker, charging a flat commission.

Optional products include futures, puts and calls – for modest portfolios - without the necessity of putting up the full face value in advance. For example, the small margin paid for a future call on a basic unit could cover your mother-in-law at death's door who has yet to pull through.

With the more recent announcement (concerning Swindler's List) the creation of VIDS marks an entirely new dimension in derivative trading on The Street. It works like this:

In the usual CCI operations, an archdiocese (such as that of Los Angeles) might buy a group insurance policy from CCI, covering the eventuality of a lawsuit or class action against one or more of its 1,500 or so priests. But that doesn't account for the "boys-will-be-boys" priests on Swindler's List. So a VIDS contract can be bought from participating Wall Street banks, led by Triple-D.

While a CCI insurance policy is a bet AGAINST the likelihood of a raping priest and the resulting lawsuit, a Vatican Insurance Default Swap amounts to a bet that it WILL happen, thus hedging against the gap in the insurance policy. It was described as a new configuration of a Credit Default Swap (which had become Wall Street's favorite vehicle in the recent sub-prime mortgage unpleasantness), whereby investment banks sold mountains of tripe to their clients as AAA merchandise and then covered the opposite outcome by betting against their quality. (Known as a straddle in Vegas which, if played against the house, can earn you a comfy hole in the desert off I-15.)

It's suggested that readers needn't concern themselves over the details. You're in good hands with Triple-D. In the case of regular CCI insurance, the Church buys from its own insurance company, both earning the premium and collecting on the pay-out. With Triple-D, for a relatively small investment, the Church is covered by the investment bank, which of course lays off the obligation like any other bookie would.

With either option, just as with the undertaker in a western shoot-out, the Vatican wins, money-wise. Render unto Caesar, or whatever.

Bill Annett grew up a writing brat; his father, Ross Annett, at a time when Scott Fitzgerald and P.G. Wodehouse were regular contributors, wrote the longest series of short stories in the Saturday Evening Post's history, with the sole exception of the unsinkable Tugboat Annie.

At 18, Bill's first short story was included in the anthology “Canadian Short Stories.” Alarmed, his father enrolled Bill in law school in Manitoba to ensure his going straight. For a time, it worked, although Bill did an arabesque into an English major, followed, logically, by corporation finance, investment banking and business administration at NYU and the Wharton School. He added G.I. education in the Army's CID at Fort Dix, New Jersey during the Korean altercation.

He also contributed to The American Banker and Venture in New York, INC. in Boston, the International Mining Journal in London, Hong Kong Business, Financial Times and Financial Post in Toronto.

Bill has written six books, including a page-turner on mutual funds, a send-up on the securities industry, three corporate histories and a novel, the latter no doubt inspired by his current occupation in Daytona Beach as a law-abiding beach comber.