John Akerson's Thoughts

Business, technology and life

Mark Cuban, Financial Engineering and the OSWMI Fund

I really love Mark Cuban’s thoughts on Financial Engineering vs. Investing.  I wish he would take his core ideas and turn them into a book. He makes great points about investors, financial engineers, and the danger they pose to the economy of the future.  I like to use metaphors to describe things – and his descriptions of the problems in the economy remind me of driving – so I’m going to use that.

Our economy is a car and we drive it. It takes a bit of effort to put on a seat belt. It takes a bit if effort to drive safe. Bad drivers in other cars are a danger to everyone on the road and the weather can only be semi-predicted in the future. At some point in time, we are going to hit ice, with bad drivers around us, and we just don’t want to take the time to minimize risk by putting our seat belts on. We don’t want the added expense of buying cars with lots of air bags everywhere. If we drive slower, it is safer, but we can’t make everyone else drive slower, and driving slower will make us late sometimes. We want to go fast, we want to be risky, and we want the rewards that come from being even more risky. Some people are too risky, and we can’t stop them all from driving. Mark Cuban says that at some point, they are going to cause crashes.

He is right.

I really enjoy his ideas when he advocates building an “oh shit we missed it fund” to protect against the inevitable crashes that will come from future financial engineering and bubbles. His other thoughtful suggestions are great, but the best part is that he realizes and points out that nobody can predict the future well enough to prevent all possible scenarios.

He suggests a failsafe fund. To quote Mr. Cuban, the mechanics of that fund would be “levy a fee of anywhere from 1c to 10c on every transaction of stocks or bonds which would go into a general fund, that I will call the “Oh Shit We Missed It Fund”. It will be there to fund the inevitable situation where someone figures out how to work around whatever regulations and tax code that is created.”

This is a simple and wonderful idea which is unfortunately (but ultimately) doomed to failure.

The problem isn’t the idea, which would essentially invest in advance in protection against future corporate and investment failures. The problem is in the political design of a government program to predict, prevent, and address the problem. Let’s say we call this the OSWMI Fund. It is a simple and powerful idea, and should be implemented. The problem is that no amount of legal lock-box creation could protect the OSWMI fund from politicians. They would raid it from every direction, every chance they got. Even if the people writing the new laws were the same congress members and senators who held their noses voting for $700 billion of Tarp funding – they would still write as many loopholes as were written into the social security code. (Which itself could be thought of as somewhat of a personal “oh shit I missed it fund.”

I think it is safe to say the social security “lockbox” has been opened so often, it has become a bit of a federally-mandated ponzi scheme where new money paid in goes out immediately for existing benefit recipients – instead of going in for the future withdrawals that will be made by the people who are paying it in. if we cannot keep a personal fund for rainy days when planning doesn’t work, with the lobbying power of the AARP pushing for an untouchable, perpetually protected fund – it would never, ever be possible to keep such a fund for corporate, investment, and financial engineering issues.

So, Houston, we have a problem. I don’t think there is a solution. Guess we better make sure that the right mechanics and medicine are available for the next financial wreck.


October 13, 2009 - Posted by | Business, Life, People

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