In Monty Python and the Holy Grail, the hardest test for one knight was "What is your favourite colour?" His reponse: "Green, no, Blue!" got him thrown off the bridge.
| Monty Python and the Holy Grail (bobisdysautonomia.blogspot.com) |
Financial speculators are often accused of doing the same thing as the fallen knight: guessing red or black in the proverbial Roulette Wheel of the market, with red being down (short-selling) and black being up (buying).
The latest 'knight' to fall off the bridge was Jon Corzine. Former Co-CEO of the notorious Goldman Sachs, Corzine went on to become Senator and Governor of New York. After being defeated in the latest election, Corzine went back to the fund-management world, becoming CEO of MF Global, a major hedge fund with Assets under Management (AUM) of over $10 Billion.
In his quest to regain his honour, according to John Gapper of the Financial Times, Corzine bet most of the firm's money (and then some!) on European debt, buying risky Spanish and Italian bonds. When these bonds turned sour, MF Global faced losses greater than $6.4 Billion! 1,066 employees were suddenly let go and commodities markets were disrupted.
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| Corzine, right, as Governor (nytimes.com) |
Effectively, our tragic knight guessed the wrong colour and failed to find his Holy Grail. Had he guessed 'Red' and bet against Spanish and Italian bonds, he would have made MF Global one of the biggest, baddest hedge funds in the world, cementing himself in history as a legend of success. Instead, he, and the fund, and everyone who worked their, are ruined.
The moral of this tale: If you play with fire, you will get burnt. If you gamble with the market, you will, eventually , lose. It doesn't matter if you were head of Goldman, a Senator and a Governor... The market is a noble woman: treat her with respect and you will be rewarded. Treat her as a game and you're sleeping on the couch!
I agree mostly on your moral of the tale. It is so true that everybody just forget about it when they are betting against these risky assets. I believe that human factor is one of the hardest things that we can evaluate and measures its impact. Corzine might have known that this was coming with his risky appetite betting most of the firm's money on European Debt. I mean, if this trend persist in financial sector, mostly in asset management,this would get even worse if European Credit Crunch happens next year as some economists say. I presume that impact could be a lot worse than the time when Lehman Brothers collapsed. What do you think it is the driver of deliberate action in executing or betting on such risky assets ? Is it really the profit or the mental obsession on betting just like in gambling ?
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ReplyDeleteI think that there are some issues in the way big investment banks and funds are managed, expecially at the business culture level. We learn from people who worked in these places that often the business incourages its employees to take more risk indirectly because of its policy to reward those who make money and making redundant those who are less efficient (what happened in Enron). How can people work in such an atmoshpere? They will feel like they have to bet on risky positions because otherwise they are out.
ReplyDeleteThe "gambling culture" has to finish.