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The Banker Who Said No – Forbes.com

April 8, 2009

A recent article in Forbes talks about a banker, Andrew Beal, who played it safe while the rest of the financial industry was taking on billions of risky loans that at the time, seemed wildly profitable:

For three long years, from 2004 to 2007, he virtually stopped making or buying loans. While the credit markets were roaring and lenders were raking in billions, Beal shrank his bank’s assets because he thought the loans were going to blow up. He cut his staff in half and killed time playing backgammon or racing cars. He took long lunches with friends, carping to them about “stupid loans.” His odd behavior puzzled regulators, credit agencies and even his own board. […]

But he wants to exploit their recklessness to amass his own fortune. Not much next to the trillion-dollar balance sheets of the nation’s troubled banks, but the lesson here might be revealed in the fact that this billionaire is not playing with other people’s money–he owns 100% of the bank and is acting accordingly.

via The Banker Who Said No – Forbes.com.

The key here is that Beal owns 100% of his bank — the principal-agent problem we discussed in a previous post does not apply. Because he wasn’t subject to the same kind of perverse incentives as other bankers, he made significantly different decisions than his peers.  His decisions were based on long term profits, not short term gain that relied on passing the buck to some future chump.  Not to downplay Beal, but it was the incentives of his situation more than anything else that led to his seemingly prophetic decisions.

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