Major league baseball, Wall Street, and companies don’t cheat. Baseball players and company executives cheat. They are the decision-makers. Agencies provide names if the cheater is a sports figure – he is the company. But, all too often, Wall Street executives are not named because their companies protect them from civil suits and criminal indictments.
Numbers drive the careers of baseball players and Wall Street executives. Baseball has batting averages, RBIs, and homeruns. Wall Street executives have investment performance, profitability, and revenue growth. There are some significant differences, but A-Rod could be one of those Wall Street executives. He admitted to cheating when he used PEDs to improve his results. The increased performance produced bigger contracts that amounted to tens of millions of dollars that he would not have received if he did not cheat. The key executives at several major Wall Street firms also cheated to improve bottom-line results when they created and sold toxic investments to their clients. They received seven, eight, and nine figure bonuses they did not deserve for increasing company profits.
Joe Morgan, the highly regarded baseball announcer, had it right when he said, “It is all about risk and reward”. He was referring to baseball where the potential rewards for cheating are in the hundreds of millions of dollars and the potential risk, if you are caught, is in the millions or tens of millions range.
Cheating in both industries produces huge financial benefits: $20 million annual salaries, major endorsement deals, and multi-year contracts if you are a baseball player. $50 million bonuses, increased stock options, and private jets if you are a Wall Street executive. The media vilifies the financial services executives as greedy. I say they are smart. For them, cheating is a risk-free strategy that produces millions of dollars of additional compensation.
What is the risk? A-Rod is appealing a suspension of 200+ games for his PED use and he may lose some endorsement deals. Wall Street executives may have to pay back some of their bonus money, or they may lose jobs. But, that is rare because they are the top executives at their firms and they have a lot of friends on their Boards of Directors. There is also a good chance the company will pay the fine for the executive. After all, the company was the main beneficiary of the executive’s decision to cheat clients.
Ultimately, it gets down to the risk of getting caught versus the rewards of not getting caught. However, the risk is insignificant when the rewards are several times greater than the penalties. And there is no risk if Wall Street companies pay the penalties. And, forget jail. When was the last time a senior Wall Street executive went to jail for defrauding investors. The agencies that regulate Wall Street prefer fines without admitting guilt. The agencies avoid legal battles and collect substantial fines. The only losers are investors who may get back ten cents on the dollar – if they are lucky.
What can investors do to protect their financial interests? Move their money from corrupt Wall Street firms to independent Registered Investment Advisors. There are no executives and the risks of cheating far outweigh the rewards of cheating at these firms.