Ownership & house money
A curiosity of the Turner review (pdf) is the importance of other ownership structures. Turner apologized for this statement:
Many executives of financial companies that have suffered heavy losses during the financial crisis (and in the case of Lehmans, total failure), were major shareholders of their companies, and in many cases, he voluntarily chosen to invest much money obligations in their own businesses. But these major challenges in the long term viability and stability of their companies do not seem to lead to greater awareness or concern about the risks they were running businesses (P81).
I am not convinced. Mental theory tells us that there is a difference between actions as a result of payment of premiums, and the actions that have staked their own money in.
Actions such as premiums paid can be regarded as some gains in a casino. You think like “house money.” And people are much more willing to take risks with money that the house of his own cash.
However, the property which leads to limit the risk appears – says Alexander Hoare – when their own money at stake, rather than bonds.
Yes, Dick Fuld “ownership” of a large part of Lehman. But it was the wrong type of property. He married money rather than their own – and, one might add, a limited liability company and investment.
Of course, the property right will not stop all failures – human beings have an infinite number of ways of being stupid with money – but the story is more than you think Turner.
