Moral Hazard

I was writing about speculation vs. investing last night, but I paused to watch a few minutes of Jon Corzine’s testimony before a Senate Committee investigating the disappearance of $1.2 billion of clients’ money at MF Global.  As I watched I thought perhaps I had mistakenly tuned in on an episode of Saturday Night Live.

Corzine was testifying along with current CEO/COO, Bradley Abelow, and Henri Steenkamp, the CFO, the latter two being long time employees of MF Global.  When asked, “What happened to the money?” all three claimed they had no idea.  The CFO (Chief Financial Officer) went on to say that with 33,000 clients, and the fact that they had dealings with a large number of banks around the world, they could not be expected to know.  This was all said with a straight face.  (Skeptical me was looking for a wink between Corzine and his former Senate Colleagues as if to say, “You know how we all play the game!”)  Sadly, it was not a rerun of an episode of Saturday Night Live, but it was a rerun of an all too familiar game played on Wall Street.

Speculation is not investing.  Speculation is when you take a position (make a bet) and if you are right you win, but if you are wrong you lose.  The risk and return is huge, especially if you are highly leveraged.  Investing, by definition, is long term in nature.

Jon Corzine became very wealthy and famous in the 90’s by being right more often than not while speculating at Goldman Sachs.  He was the proverbial monkey that flipped “heads” several times in a row.  On Wall Street this kind of luck is too often mistaken for skill.  After an unsuccessful career in politics, and spending most of his fortune, he decided he would have another go speculating in the market, this time at MF Global.  (Obviously it is more fun, and a lot less risky, if you can speculate with other peoples’ money.)  He decided to bet on Sovereign Debt issued by the Countries in the Euro-Zone.  “OOPS!”  This time he flipped “tails” and MF Global collapsed.  I can’t feel too sorry for the shareholders of MF Global, they applauded when Corzine was hired.  They remembered how much money he made for Goldman.

But what about the clients and their $1.2 billion?  Eventually we will learn what happened, and when we do what will be the result?  Will anybody be held accountable?  Will taxpayers be left holding the bag once again?

All of us are share some of the blame.  We know and care more about the Kardashians, than we do about our politicians and what they are doing.  Unless we get our priorities realigned nothing is going to change, and that will be a costly mistake.

3 Comments

Filed under Investments, Investors

3 responses to “Moral Hazard

  1. Well said Dan – people should remember that the ‘proverbial monkey that flipped “heads” several times in a row’ very rarely walks away having been paid ‘peanuts’.

  2. “We know and care more about the Kardashians, than we do about our politicians and what they are doing.”

    Gold Dan, pure gold…

  3. Lane Powell

    Great thoughts Dan. I’m a little frightened by your Kardashians reference. I’m frightened because I think you’re right. If life imitates art, and you make the leap that television shows are a form of art, flip through all the channels of your local cable provider’s lineup and you see a pretty dismal view of life. As a country, we are going to have to quit waiting to be entertained and to find a way to create our own inspiration.

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