GREED IS GOOD: Andrew Lo Believes An Exotic Financial Instrument Could Help Cure Cancer Within 20 Years

Andrew Lo

Photo: PBS Newshour

Can greed cure cancer?That is MIT Finance Department Chair and world influencer Dr. Andrew Lo’s latest hypothesis. 

In a forthcoming paper, Lo will argue that the structure of collateralized debt obligations — yes, the same securities that are often blamed for the financial crisis — can be used to gin up the money needed to launch hundreds of trials for effective cancer drugs.

Lo recently outlined his paper in a Yahoo Labs talk.

He works from the following premise: coming up with a single, effective cancer drug costs $200 million spread and takes 10 years. 

That does not sound like a good investment.

But if you created one large pool of 150-such asset ventures, your odds of a decent return on investment increase.

So how do you raise $30 billion? 

Similar to CDOs, Lo proposes creating “research based obligations” or RBO bonds, that would be divided into tranches with different risk premia (with AAA-rated bonds yielding a lower coupon; riskier bonds, higher).

But what’s the underlying asset? Well, Lo is not counting on anxious venture capitalists looking for a 150 per cent return to be interested. And besides, the VC market is not nearly big enough.

Rather, Lo intends to tap what he refers to as “patient capital” — pension and money market funds, most of which aren’t looking for a return of more than 8 per cent or so. And besides, those guys are throwing around trillions of dollars.

Lo sums up the project thusly:

“If we are able to allow people to earn a decent rate of return, with sufficient scale, we can all do well by doing good.

“Some people might say, ‘Can we afford it?’ I think that’s asking the wrong question…We should instead be asking, ‘Can we really afford not to try?”

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