A Toast To Unintended Consequences

I suppose I should be worrying about Google’s ongoing attempt to monopolize all human knowledge, but I’m too busy enjoying the freebie books the company scans onto the web. Was browsing a book on Murphy’s Law today, for instance.

So which Murphy’s corollary tells us why it may not work when sensible folks make sensible efforts to control the behavior of Wall Street? I think it’s the Law of the Perversity of Nature: “You cannot successfully determine beforehand which side of the bread to butter.” (This law, naturally, contains the unspoken assumption that the bread will end up on the floor.)

Two examples. My favorite is from House of Cards, William Cohan’s book about Bear Stearns. Here, the bread got buttered by the Bear Stearns compliance department, which realized in 2006 that Ralph Cioffi’s MBS hedge fund was regularly violating the law by trading with Bear, a related party, without proper disclosure. So - very sensibly and responsibly - the compliance folks told Cioffi to stop dealing with Bear’s trading desk.

Uh-oh. As Cohan writes, this move took away “the eye the Bear traders had been keeping on what Cioffi was doing, since he was a counterparty on their trades.” According to one senior Bear executive, traders used to run to the firm’s co-President, Warren Spector, and say, “Listen, are you aware what Ralph bought? You might want to look into this.” But once the compliance department put up a proper wall between Cioffi's fund and its affiliated broker, the tattling stopped. And the fund blew up, taking Bear with it.

The second example is from Michael Lewis’s excellent Vanity Fair piece on AIG Financial Products, your friendly neighborhood Credit Default Swap-Mart. You see, things were OK when Hank Greenberg, AIG's “bullying, omnipotent ruler,” was watching Joe Cassano, infamous head of the F.P. unit. But, in early 2005, along came Eliot Spitzer (then NY’s attorney general), who cleaned house at AIG, forcing Greenberg out. This left Cassano as the bullying, omnipotent and ignorant ruler of the unit, with predictable consequences.

I guess we could all resort to dry toast, no butter at all. But then there's still Flugg’s Law: “When you need to knock on wood is when you realize the world’s composed of aluminum and vinyl.”

Actually, that doesn’t apply here at all; I just like saying it.

image credit: www.dailymailco.uk