The Wrong Message

This morning, I sent my son a story I was reading at The New York Times web site.

Wall Street Winners Get Billion-Dollar Paydays

Specifically, I pointed out this part:

” Mr. Simon, a mathematician and former Defense Department code breaker who uses complex computer models to trade, earned $2.8 billion. “

Some of you might remember, my son is pretty good with math. (No, sadly/gladly he didn’t make MIT.) I sent him the blurb about Mr. Simon to pique his interest. I’ve always thought my son would have a knack for codes. Of course, I’ve always thought my daughter would make a great lawyer so what do I know ?

I chewed on this story for most of the day. It kept nagging me. Especially this part...

”One manager, John Paulson, made $3.7 billion last year. He reaped that bounty, probably the richest in Wall Street history, by betting against certain mortgages and complex financial products that held them.“

...with this part added in.

”“There is nothing wrong with it — it’s not illegal,” said William H. Gross, the chief investment officer of the bond fund Pimco. “But it’s ugly.” “

Illegal and wrong are two different things. But Mr. Gross is right about one thing -- it is ugly. I chewed on it some more -- and even more -- when I listened to the same story on Marketplace while driving down the road.

”Paulson made his money investing in complex bets against the subprime mortgage market. When these mortgages defaulted last year, Paulson's funds rose as much as 600 percent, and like most hedge fund managers, he pocketed 20 percent of that. Paul Dorf, at Compensation Resources, endorses multimillion dollar packages for corporate executives, but billions makes even him outraged.

PAUL DORF: It doesn't look kosher, particularly if you dig into what they're making their money on.

He says most of the funds making huge profits . . .

DORF: Are betting on commodity prices for oil, the fact that banks are going to fail. “

I’m slow but I finally caught on to what was bothering me. The richest -- and brightest -- guys in America are making their money off of misery. Perhaps it was the previous segment on the radio that pointed out the price of rice (a “commodity”) has doubled in the last few months. Perhaps it was the thought passing through my head that the bright guys were selling mortgages they knew were bad risks, knowing that they could hedge (that’s where the term hedge fund comes from) their bets and make even more. Sort of a “heads I win, tails you lose” proposition. It’s spooky to think that all that might not be illegal.

What makes it wrong is the fact that they didn’t tell anybody. If the best and brightest believed the subprime market was going to go bust -- if they were so sure that they were willing to bet billions on it -- why didn’t they warn anybody ? Too busy making money ?

As this thought occurred to me, I saw my friend Powell pull up, so I hopped out of the truck to talk to him. Powell has been around a few years longer than I have. As I was explaining that these guys were getting rich by betting on the subprime market going bust, it took him about two seconds to figure it out. “Don’t you think they should have warned the rest of us ? That’s just wrong.” I hate it when that happens. Somebody just spits out the right answer on something I’ve been chewing on all day.

I wish I had thought fast enough to keep from sending my son the wrong message. There’s nothing wrong with getting rich. It’s getting greedy that makes it wrong.

Don Brown
April 17, 2008

P.S. For those interested, here’s an interesting story I found while researching this piece. A few people actually have been trying to warn us.