The Game of Risk Redux

By Gil Y. Roth | November 14, 2011

Euro long way from the governor’s mansion . . .

In this space in the September 2008 issue, I wrote about notions of risk in the financial sector and highlighted a book called When Genius Failed, by Roger Lowenstein. The book covered the collapse of Long-Term Capital Management (LTCM), a hedge fund that over-leveraged on its arbitrage deals and blew up when Russia defaulted on its debt in 1998. The collapse required a bailout from all the major investment banks of the era, including Goldman Sachs.

The chief executive officer of Goldman at the time was Jon Corzine, who was later elected to the U.S. Senate and then became governor of my home state of New Jersey. I try to make it a practice not to write about politics in this space anymore, because I think it’s largely degenerated into high school football team boosterism, but bear with me.

I voted against Gov. Corzine in the 2009 election. I didn’t like the way the state’s finances were being treated, but I really didn’t like the notion of a former Goldman Sachs CEO gaining another term at the helm. The ugliness of our plutocracy really came to the fore after the subprime crisis revealed the house of cards of our financial structure and its intertwining with the levers of government; I guess you could call my vote a pre-Occupy Wall Street moment.

I’m increasingly glad I didn’t vote for the incumbent in 2009. Sure, Chris Christie, Gov. Corzine’s successor, has made his share of gaffes and has had to make some unpopular decisions on the state’s budget. Also, it’s apparently mandatory to criticize him for his weight, as though it’s a moral failing that precludes his ability to govern, but that’s a topic for another column.

After Mr. Corzine lost his re-election bid, he went back to Wall St., taking over a brokerage named MF Global Holdings in early 2010. By Halloween 2011, MF Global declared bankruptcy, having over-extended itself to buy up Euro-debt, as per Mr. Corzine’s get-big-quick strategy. Like LTCM, MF Global was leveraged around 30 to 1, and when creditors got nervous over its bets, it was unable to get funding to pay loans.

One potential investor/savior ran away screaming when its audit uncovered hundred of millions of dollars in missing funds the client side of MF’s brokerage. Mr. Corzine resigned after the bankruptcy and has allegedly hired a criminal defense lawyer. He was kind enough not to ask for his $12 million bonus on the way out the door, and has offered to help find clients’ missing money. People continue to crack jokes about Gov. Christie’s weight.

Mr. Lowenstein, author of that book on LTCM, wrote a great piece at BusinessWeek about Mr. Corzine’s amazing fall. In it, he marvels over the ex-governor’s inability to learn the lessons of LTCM (given Mr. Corzine’s ringside seat for that meltdown), repeats the adage that the market can stay irrational longer than you can stay solvent, and rails against the continuing stupidity of financial types who consider liquid assets an escape hatch from risk.

Ah, back to risk. My point here, as ever, is that we continue to fail to understand risk. In the R&D Outsourcing interviews I conducted for this issue, the issue of risk is the through-line, whether it be in terms of getting less risky compounds into the clinic or reducing the costs that go into development and lowering the price of failure. I don’t know how we make progress from here, but I think Mr. Corzine has helped demonstrate that we probably don’t need to have the finance guys make the big decisions. I’m just glad he’s not making decisions about my money anymore.

What I’m Reading

Corner Office: Joe Jimenez – Fix the Problem, and Not Just the Symptoms
Adam Bryant, New York Timesnyti.ms/sSDui9  
Comment: Novartis’ CEO talks about leadership issues, the willingness to hear bad news, and the need to take risks (just not Corzine-sized risks, I hope).

Edison vs. Westinghouse: A Shocking Rivalry
Gilbert King, Smithsonian.com blog, Past Imperfectbit.ly/tEPUW3
Comment: The author contrasts the battle between Steve Jobs and Bill Gates with the 19th century's “War of Currents” between Edison and Westinghouse. It's a fascinating piece about the commercialization of electrical power and the race to see, um, who could electrocute someone most effectively.

What are you reading?
Let me know — at gil@rodpub.com, www.goodreads.com/groth, www.linkedin.com/groups?gid=1775433 or www.facebook.com/contractpharma — and the first respondent wins a prize!