Don't be the sucker...

I've been reading about some of the more exotic financial instruments that were (and in many cases still are) available which contributed to the financial crisis. Many of these so-called derivatives or derivative-based bonds were based on one very plain assumption - somewhere there had to be a loser, a patsy, a sucker. Almost all of them are based upon paying out to shift risk to someone else - in the final analysis that is the sucker. In many cases leading up to the big crash those suckers were financial institutions - banks both foreign and domestic which had money to invest and little to know knowledge about what they were investing in. In most cases those banks really represented the assets of their investors and depositors - the ultimate suckers in the string.

Recently there have been stories about individual investors, people like you and me, getting lured into the sucker role by the promised high returns on some of these Wall Street inventions. Most of the funds or investment vehicles have fancy sounding names and none that I know of has the word sucker in the name; but they might as well. They are all sucker bets. The individual investor has about as much chance of making a return as you would playing three card Monty on a New York street corner or finding the pea under the shell at the next corner.

So why do people play this sucker game? Because somebody with a fancy sounding title and maybe even a fancy Harvard degree and working for a big New York investment banking company is promising 8-19-13% returns on your money. And what about risk? Heck, why do you think they call them hedge funds, they are there to hedge against risk. True enough; but, whose risk are they hedging? Not the individual investor, because they are at the end of the risk hedge value chain - they are the suckers who take on the risk. If the bottom drops out of a hedged investment way up at the top, everybody down the line collects against the hedge - except, of course the suckers at the end.

My take on all of this is that it is best not to be cast in the role of the sucker, even if the rewards look good in the beginning. There is no end game that makes sense if you are playing the sucker. The truly sad part of all of this is that a whole bunch of really well educated people, who really do understand this all, know exactly what they are doing to the suckers downstream and they are OK with that. Apparently courses in ethics and morals were not a part of the curriculum at their fancy schools. Rather than the golden rule "Do unto others as you would have them do unto you"; these folks live by the motos "There a sucker born every minute" and He who has the gold rules." Sad, sad, sad.