Moral Hazards


In fact, the safest way to make money was not to try at all. This is the lesson of Seneca: the safest way to make money is not to take any risks.

In the fall of 2011, I started a blog called Moral Hazards . It was intended as a kind of forum for people who wanted to engage in moral hazard capitalism, but without actually engaging in anything that could be labeled “risky” (i.e., everything on the list of bad things that Wall Street calls “tactics”: derivatives; credit default swaps; Ponzi schemes; MBSs). The idea was not so much to encourage people to invest but rather to point out that there are lots of ways you can invest without taking any risk whatsoever, and as long as you don’t go too far off one side or another, you can even get rich without investing at all.

The first moral hazard is that it is, in principle, possible to make all the decisions you want to make about your money with perfect clarity. The second is that there are always risks involved in anything we do. All the same, when you google “moral hazards” you don’t find any hits on this blog.

The most important lesson to learn about money is that it’s not a very good thing to trust. Money makes people greedy. It’s a kind of weapon, an instrument of power, and those who have power over money will use it to get even more money.

It is a strange way to think of money, but it is true.

When you don’t trust other people with your money, it means you don’t trust them to tell the truth. And what do people usually lie about? They lie about other people’s money. If you’re not sure that your wife doesn’t have another lover, it might be because she’s lying to you about her lover having enough money for her to live on in luxury.

In January 2012, the Securities and Exchange Commission (SEC) filed a complaint against an investment adviser, Michael Coscia. The SEC claimed that Coscia had defrauded his clients by recommending that they take out CDOs (collateralized debt obligations), “which he knew to be high-risk investments.”

“Although the securities market has become more sophisticated over time,” the SEC said in a statement, “there remains a significant level of risk in investing in CDOs and other complex securities.”

Coscia was no fool. He had invited his clients to attend a seminar at the Seneca Golf Course in suburban Detroit. The SEC said he told them: “The golf course was one of the best courses around, and it would be great to show off what we do.”

Maybe so. But when it came time for pitches from brokers offering their CDOs, investors were asked to sign one document with an SIPC insurance rider attached. By law, the insurance company couldn’t pay unless the broker’s firm was sued for selling fraudulent products. The contract also required investors to pay for their own defense costs if they sued. For investors unaware of this requirement, it seemed like a sure thing: “If you ever go to court because of this,” Coscia

I wrote this essay in an attempt to explain why the risks associated with investing are so great. I still think the risks are greater than people realize, but the essay is probably more about my own neuroses than about the actual situation.

I recently sold my house and moved back to Seattle from San Francisco. While I was still in that house, I put out a few fires, some of them minor and none of them serious. When we moved here, I had a bunch of other things to do, including finding a new job and trying to get myself organized for a move.

I intended to do that over the next month or two, then go back and work on my blog again. But before I could do any of that, we had a fire in the house. So instead of going back to work on my blog (which would have only involved me sitting at the computer), I decided to buy some fire insurance: $11,000 worth of coverage for $2,000.

This was not such a bad idea; it kept me from having to write any checks until all the other things got done first, which meant it kept me busy without giving me any immediate new problems. When you’re moving, everything takes longer than it should.

But when

The trouble with golf is that the second you stop learning, you start playing. It’s not like chess or poker. The better you get, the worse you get. The only way to keep getting better is to keep trying new things, learning from your mistakes, and trying again and again until something sticks.

My biggest mistake was trusting people I’d known for a long time. People who were good at golf were good at other things too. But I thought they’d always be good at golf, and I wouldn’t have to worry about them being good at other things. And when they lost their confidence, I didn’t know how to bring it back.

The lesson: go back to basics and learn everything all over again.

I’m not a gambling man, but I like a good game of Seneca Golf. There is something about the game that I don’t get from golf. When I play golf well, I feel like a decent golfer. When I play Seneca Golf, however, I feel like I’m cheating.

Seneca Golf is a game that evolved over several hundred years in the back alleys of the Italian city of Naples. It has been played by Neapolitan thieves, butchers, and barmen for so long that it’s hard to imagine them playing anything else. The gameplay is based on the idea that you are always trying to hit something valuable with your ball. The rules are simple:

1) You have only four shots per hole; after you’ve taken your last shot, you must leave the course immediately or be punished. You may take whatever you want with you (long as it can fit in your pocket).

2) If someone catches you stealing from their handbag/pocket/bin/trolley/sack/pile of garbage/etc., they will retaliate by taking whatever goods you were going to steal from them.

3) If someone tries to help you while they’re being robbed, they too will be robbed —


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