Understanding what happened

by Russ Roberts on May 21, 2009

in Financial Markets

I am scheduled to interview Riccardo Rebonato tomorrow for EconTalk. His book, Plight of the Fortune Tellers is one of the best things I've read about the crisis. Maybe the best. Written before the crisis, Rebonato warns of the dangers of the techniques being used at the time by both firms and regulators to assess the riskiness of their portfolios. He has a lot to say about probability, risk, and the seductive romance of the ill-suited applications of advanced mathematics. Best of all, it's very well-written and though at times, very ambitious, it is always accessible to the non-practitioner.

He has a fascinating discussion of "economic capital," the amount a firm would hold on its own to avoid the risk of bankruptcy. He argues that firms will hold too little capital because they will rationally ignore the spillover effects a collapse of their firm would have on other insititutions, so-called systemic risk. But a firm doesn't want to go bankrupt. It may take too much risk and end up bankrupt anyway.

Rebonato also points out that bondholders and stockholders have different goals for the firm. Bondholders want enough profitability to get their money back but do not share in any upside risk. Stockholders generally wnat more risk even though there is the risk of bankruptcy. For a naif like myself, this raises the question of why these institutions have both stakeholders with such conflicting goals. And the managers in these publicly traded companies would seem to have different goals as well.

A few semi-random questions, a few of which I hope to ask Rebonato tomorrow.

If it's hard to assess risk, and therefore hard for regulators to specify what is "enough" capital, how would an unregulated firm choose economic capital to reassure bondholders and stockholders that their firm is a good risk?

Why did firms choose such radically different levels of riskiness when they faced similar constraints?

Some people argue that the reason firms took on so much risk was because they were publicly traded. Didn't investors know about the moral hazard problem?

Was "too big to fail" an important, crucial, or irrelevant factor in the risk profiles these firms ended up with?

What role does mark-to-market play in risk assessment?

How did the ratings agencies distort choice if at all? (He seems to think it did.)

How much did Basel II distort choice, if at all? (He seems to think it did.)

Rebonato also observes that the 1990s reduced profit margins because of increased competition, encouraging innovation as a way to achieve yield. That's generally good. But Rebonato implies that firms continued to take bigger and bigger risks as a way to sustain yield. Why didn't self-regulation slow or stop this?

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Methinks May 21, 2009 at 6:25 pm

this raises the question of why these institutions have both stakeholders with such conflicting goals.

Companies seek to optimize their cost of capital.

For lots of reasons (including tax treatment, and priority of payment) debt is cheaper. But, a company must service it. If the business is risky and cash flow is unstable, then financing solely with debt is impossible.

It's too expensive to finance solely with equity as equity holders demand a higher return. Thus, ideally, a company will start out almost entirely equity financed but will take on more debt as it matures and its cash flow becomes more stable. A mature companies expected returns also declines over time and it becomes less attractive to equity investors while the stability of cash flow appeals to bondholders.

Methinks May 21, 2009 at 6:35 pm

But Rebonato implies that firms continued to take bigger and bigger risks as a way to sustain yield. Why didn't self-regulation slow or stop this?

Competition. We all compete for investors and investors seem to completely ignore risk (i.e. don't risk adjust the return) when things are pretty calm. They want return at any cost and they will punish any company or asset manager who doesn't produce to expectation – at any cost. It's not entirely their fault. All the banks that failed were compliant with regulations. Risk assessment is imprecise, paradigms shift, making risk management difficult (if I may grossly understate).

I look forward to this econtalk. I'd really like to hear his answers to these questions.

Methinks May 21, 2009 at 6:47 pm

I'm sorry to post for a third time in a row but I forgot to add this to my first post.

Leverage enhances returns and as a company levers up, it enhances returns for shareholders. The goals of the bondholders don't change and they protect themselves from too much leverage by putting limits on the company in the debt covenants.

The goals are not as different as one might expect. Firms must meet their financing need or cease to exist. Going out of business is bad for both equity and debt holders. Too much debt is too risky. To much equity is inefficient. The correct mix enhances returns for shareholders while still protecting debt payments. The hard part is figuring out what the right mix is.

Greg Ransom May 21, 2009 at 7:05 pm

Firms don't choose. Individuals do.

Russ writes:

"Why did firms choose such radically different levels of riskiness when they faced similar constraints?"

One answer would be that the _individuals_ running these firms "face" different incentives and different subjective trade-offs.

Russ Roberts May 21, 2009 at 7:08 pm

Methinks,

Please keep those comments coming.

How does taking on too much risk attract investors? Are the investors myopic or are they implicitly counting on "too big to fail?" Or are they just irrational?

Dave May 21, 2009 at 7:17 pm

I'd be interested in hearing his take on the role of the GSEs. Was their participation a primary cause of the housing bubble/financial crisis? Were they leaders or followers in chasing low quality mortgages for securitization? Did they crowd out the role that non-GSE firms would filled anyway? How was their implicit government backing a factor? Basically, how does he view their marginal impact on the crisis? Thanks.

Methinks May 21, 2009 at 7:30 pm

Russ,

It's not the additional risk that attracts investors – it's the additional return. Of course, risk and return is positively correlated*. Investors tend to ignore the risk necessary to produce large returns until it's too late. In doing so, they effect the behaviour of asset managers. It becomes a positive feedback loop.

I think people often focus only on the benefit portion of the equation and don't take full account of the cost.

*The exception is a true alpha return. But alpha is difficult to extract and sometimes it's difficult to measure if excess return is truly an alpha return or just due to excess unmeasured risk or just luck. In any case, there is no alpha to be extracted in in efficient markets.

Methinks May 21, 2009 at 7:51 pm

I'm copying this comment written by Morganovich on Coyote's blog several months ago. I think he does a great job of explaining how risk piles up and is ignored:

"my suspicion is that the real cost lies not in the inability to assess risk, but the lack of desire to. let me explain:

in a bull market, those who take risks tend to get rewarded. the problem is that as they progress (and potentially turn into bubbles) the risk reward diminishes. worse, overall reward tends to diminish as well. when returns start to drop, investors are left with a challenge: "how do i keep my returns up?" obviously, everyone can't outperform the market. so they lever up. if i am 200% long, my 5% return is now 10%! and in long bull markets free from nasty shocks, such a policy seems safe. what's more, you get rewarded for it. recall that dick fuld was the toast of new york in 2006-7.

investors want returns. employees want returns. this drives risk taking. and it becomes an arms race (and a prisoner's dilemma). the best analogy i have come up with is imagine you are in a car race. fog has settled on the course. you can see well enough to drive safely at 50mph. some guy passes you at 70. what do you do? if you chase him, you risk missing a turn. if you don;t, you risk losing the race. do not underestimate how quickly and loudly shareholders will howl for your blood if you are losing. they see the performance of other firms and demand that you match it. worse, you are managing hungry, aggressive people who are getting into markets you may not understand well and have big incentive to show outsized profits and grow their fiefdoms. they compete with other banks and with one another internally. you can tell them it's unsafe all you want. they may not care. or they may just think you are too dumb and old fashioned to compete anymore or that you don't understand.

bosses get replaced. more risk piles up. the big risk takers on the trading desk have gained power and share of the firms assets. a bubble magnifies this all out of proportion. at the top, everyone is way too long. but they have been making money hand over fist. they are confident in themselves and rarely see the turn coming. then things go wrong. the real professionals see this and cut losses quickly. the also rans wallow in cognitive dissonance. they are so sure they are smart and right that they ignore all the evidence that they are in real trouble. sometimes all the way to the bottom a la dick fuld.

bull markets always end that way and bear markets bottom when these guy's blood is in the streets. it's never going to change. trying to head it off for decades while inflating new bubbles to try to offset the popping of the previous one just leaves a huge, intractable mess when you finally run out of bubbles. it's like doing shots to prevent a hangover. eventually, it's going to catch up with you…"

Russ Wood May 21, 2009 at 8:13 pm

I too look forward to the interview.
I appreciate the great insights of Methinks, but I will be looking to see if Rebonato touches on several items highlighted by Russ Roberts in the past:
The great moderation lully investors and corporate managers and politicians into complacency;
The Greenspan put assuring same participants that the Fed stood ready to keep the good times rolling;
Helicopter Ben's raise of the Greenspan put;
New finance/pseudoscience and the promises of being able to offload risk via derivatives;
Glass Stegal repeal and allowing traditional banks to play casino.
Thanks,

MnM May 21, 2009 at 8:29 pm

Allow me to second the Russes (hehe). I'm loving it Methinks. Takes me back to a couple of the finance courses I took in school.

DaveM May 21, 2009 at 10:40 pm

"Why didn't self-regulation slow or stop this?"

Interesting clue as to this from neuropsychology — there seems to be a neurologic bias in favor of immediate rewards as opposed to longer term ones, especially when folks allow the emotional components of decision making to dominate their rational "better sense" (for example, see The Journal of Neuroscience, December 20, 2006, 26(51):13213-13217).

So it may be that there is a biologic bias towards immediate rewards over long term ones, especially when we allow emotional investment to influence our choices.

Was the meltdown a version of "Let 'er ride…baby needs a new pair of shoes!", writ large?

John Dewey May 21, 2009 at 11:36 pm

methinks,

I agree in general with your remarks about capital structure. But I want to point out that not all CEO's buy into the concept of matching capital structure to the firm's life-cycle.

I remember passionate discussions about optimal capital structure at Wharton over two decades ago. It was difficult for me to understand why large, stable companies with long term earnings growth remained under-leveraged relative to their industries. Why were they not taking advantage of the much lower after-tax cost of debt?

What I've learned since then – through direct conversation with a few CEO's and CFO's – is that maximizing shareholder return in the short run is not the only goal. Companies such as Fedex and Southwest Airlines and others have long been committed to a no-layoff policy. Those companies believe that over the long term, the deep commitment to employees will result in maximizing shareholder return anyway. Fedex calls this their People-Service-Profit philosophy, and I love to explain it if anyone is interested.

John Dewey May 22, 2009 at 12:02 am

Further remark about company culture and capital structure:

Eli Lilly is an interesting case to me. When I talked with them in the 1980's, thjeir recruiters and finance executives all pointed out their commitment to employees job security. The company had long been committed to no layoffs, refusing to cut jobs even in the 1930's depression years. The company was proud that it had accepted the higher cost of no-debt capital in order to ensure employee jobs.

Today, Eli Lilly is about the highest leveraged of the major U.S. pharmaceuticals. The company also annonced ;ayoffs in 2008, which I believe is a company first.

What changed? Why was the company culture that served them so well for decades changed?

The Albatross May 22, 2009 at 1:35 am

John,
The simple answer is that few people are possessed of the competence to run businesses. I have only recently become aware of this as I have noticed that I am not one of these people. What I do know is that many people fancy that they can do better—well, guess, what you (not necessarily you John Dewey—whose posts I think the utmost of) cannot. Running a business is hard and a rare skill, which is why most folk prefer to not run their own businesses and work for others. That is what so many folks dislike about the market—that it uncovers them for the unproductive frauds that they are. Instead, they hide behind the corporate entities or trade barriers that allow their otherwise pathetic existences, while flinging stones at both of them. What changed is that the market changed, and if you don’t change with the market (as in what the people want), then you are a pox upon humanity. Markets are about what people want—not what you want, and while we pine about what is good for people, we must remember what Ludwig von Mises said when he (well said) “that most people find Hamlet boring.”

Chris O'Leary May 22, 2009 at 1:39 am

"Why didn't self-regulation slow or stop this?"

I have read a number of fairly damning articles that suggest that the computer risk modeling systems that many institutions used were pretty dramatically over-extended. In particular, they worked with conventional mortgages but not with subprimes.

That likely gave a lot of people a false sense of security.

To use and extend the "race in the fog" analogy (which is quite nice), imagine that all of the race cars had these fancy head-up displays that had infrared overlays that worked just great under normal conditions but, unknown to the drivers, stopped working reliably when the ambient temperature dropped below 75 degrees (or whatever).

Gary May 22, 2009 at 1:45 am

Methinks, I like the story about racers in the fog and the pressure on bosses to produce returns. But it's important to remember that not all shareholders are alike. Some are attracted to risky firms and encourage risky behavior. Some are attracted to safe firms and encourage safe behavior.

Is it possible that banking bosses were serving their shareholders well? Speeding around corners with the knowledge that they might not finish the race, but knowing that, if they did, they would achieve vast rewards? Surely, some upsides are worth risking the company for (entrepreneurs do it every time they start a new company)!

Chuck May 22, 2009 at 3:45 am

Everyone says the financial industry took on too much risk, but it seems to me they hedged their risk very well making some valuable "investments" with the government.

Martin Brock May 22, 2009 at 5:17 am

Methinks: "It's not the additional risk that attracts investors – it's the additional return. Of course, risk and return is positively correlated."

Herds can follow common fallacies. Higher yield implies higher risk, and people commonly believe that diversification lowers risk, so people try to achieve higher yields at lower risk by holding many, independent, high risk investments.

The fallacy of this strategy is that diversification lowers risk. Diversification lowers risk only if the yield distribution is thin tailed, but focusing on high yield investments, on the "bleeding edge" of development, selects a fat tailed yield distribution, so a diversified portfolio can be just as risky as a single investment.

John Dewey May 22, 2009 at 7:08 am

chris o'leary: "I have read a number of fairly damning articles that suggest that the computer risk modeling systems that many institutions used were pretty dramatically over-extended."

I have read that as well, Chris. As I understand it, their risk models included the assumption that housing price declines would be confined to one or two geographic regions. A nationwide collapse of housing values was inconceivable. If mortgaged based CDO's contained a geographically diversified portfolio, default risk would be reduced.

I guess their assumption was wrong.

MT May 22, 2009 at 7:49 am

Russ, it would be great if you could explore in the interview the role the Fed played.

There is lots of discussion in this thread about risk taking. I'm curious to learn whether the Fed was pumping huge amounts of money into the system in 2004-2007. If so, how did this affect decisions on risk? At the margin, did it lead inevitably to putting more money in the hands of those who would chase yield into riskier and risier areas?

Also, based on current/recent Fed and Treasury actions, are we looking at the same thing in the next few years? Where will the next bubble be?

Ward May 22, 2009 at 8:02 am

I do not think there is a conflict between equity, debtholders and management until management obviously fails to manage the capital structure of the company. The long boom and bust made it very difficult for many companies to manage their capital structures effectively. Lilly is an interesting example for 20 years big pharma had pricing power because lots of great mass produced drugs were coming to market liptor, prozac etc. but the science has moved in addition to all the other issues with that industry, maturation. Govt involvement is just another variable

John Dewey May 22, 2009 at 9:58 am

ward: "I do not think there is a conflict between equity, debtholders and management until management obviously fails to manage the capital structure of the company. … Govt involvement is just another variable"

Consider how much government actions can influence capital structure.

In 1993, Clinton and Congress decided to limit the tax deduction on executive pay to $1 million. Corporations quickly learned to get around this law by increasing stock options. The increased stock options led CEO's to favor short term stock price gains over long term viability. Increasing the proportion of debt financing increased short term earnings results. Stock prices soared, and so did overall executive compensation. But the long term effect was increased leveraging of firms.

Corporate tax rates, capital gains tax rates, and dividend tax rates all greatly influence capital structures. Interest on debt is tax deductible, but dividends are not. With marginal corporate tax rates at 35%, the government has lowered the cost of debt financing 35% relative to equity financing.

High tax rates on dividends would lead firms to favor earning retention over earnings distribution. Ceteris paribus, such rentention leads to a less leveraged firm, as more equity and less debt is used to finance corporate investments.

Laws of our government overseers drive capital structure decisions as much or more than corporate cultures, IMO.

Methinks May 22, 2009 at 11:02 am

John Dewey,

You're absolutely right, of course. Also, the optimal capital structure depends on the industry. For example, independent E&P companies retain a risk profile roughly similar to a tech start up regardless of how long they've been in business. Strangely, they love leverage and usually pay a heavy price because of it when prices tank.

As for a nationwide housing price decline, I found the models odd. In the past, Real Estate phenomenons tended to be a regional. But, here we were in the midst of not only a national but an international Real Estate phenomenon. If prices went up together, why can't they go down together? "Because that has never happened before", I was told. I don't know, but that thinking seems strange to me.

Gary,

I think it's important to remember how much pressure shareholders can put on you when they see other banks' or hedge funds' returns pull ahead of yours. Is it in the best interest of shareholders or employees to jump off the bridge with the others? I don't think so. Do investors and employees care? Not until it's too late. If you don't jump, you are replaced. Morganovich is a hedge fund manager and I bookmarked his post because it is the best illustration of what happens "on the ground".

If you ask me, the biggest mistake Wall Street firms ever made was going public. They should have remained privately held. I have far more control and connection with my investors because my firm is private and I didn't feel the pressure to take unnecessary risk. If an investor thinks that I'm too cautious, he is free to leave and I have the power to carefully choose which investors I accept. In a public company, managers are under constant pressure to outperform because everything is tied to stock price from reputation to compensation schemes and there is no real connection to public investors beyond earnings and stock price – which investors always want more of but don't always understand the risk taken to get it. large Hedge Funds are similarly disconnected from their investors and take a lot of hot money – people who want a high return and they want it now and if you don't give it to them, they redeem to chase high returns elsewhere.

Martin,

Just to flesh out your theme a bit more…

Even with a portfolio of very risky but poorly correlated assets, you do get some benefit from diversification. Once you are fully diversified, however, what's left is beta risk (a.k.a systemic or undiversifiable risk). So your portfolio will go up or down as much as the overall market (or, if you're diversifying within a sector, as much as the sector) but less than an individual stock.

Uncorrelated assets (or really – poorly correlated assets) tend to remain uncorrelated only when things are relatively calm. During shocks, everything tends to become much more correlated and a previously uncorrelated portfolio becomes extremely correlated, dampening the effect of diversification across asset classes and countries.

There's another problem with risk management – models assume a normal distribution. This makes extreme (tail) risk exceptionally difficult to price. As Nassim Taleb points out, these extreme events are usually underpriced. The problem with CDS is that it's essentially a "teeny" (way out of the money) option – the very option that the Black Scholes model prices poorly. Thus, firms that write teeny options have to be better capitalized than firms that write close to the money options. But they weren't and it's not clear anyone even knows how capitalized they would need to be.

Insurance companies write teeny options every day and have very high capital requirements imposed by regulators. However, insurance companies are now asking for TARP, so I don't know if that means that they were undercapitalized after all. I'm not familiar enough with that situation. If they aren't capitalized enough, then the regulator doesn't know the level of adequate capitalization either (to which I can just hear everyone reading this say "well, DUH!).

Seth May 22, 2009 at 2:53 pm

"Rebonato also points out that bondholders and stockholders have different goals for the firm. Bondholders want enough profitability to get their money back but do not share in any upside risk. Stockholders generally wnat more risk even though there is the risk of bankruptcy."

I disagree. While bondholders don't share in updside risk, I think they want shareholders to make as much money as possible to for a couple reasons, safety and more business.

For the other questions, groupthink is a possible answer. I worked in the finance department of an electric utility in the late 90s. We did things similar to Enron, but on a smaller scale. As a junior analyst I couldn't fathom why we went through the effort and took on the risk for marginal or only perceived economic benefit. I asked my boss. Her reply, "because other utility finance groups are doing it and we have to look like we're on the cutting edge." The Emperor's New Clothes. Pretty much the same reason for 70s fashion.

Kevin May 22, 2009 at 6:44 pm

To be clear, the following statement could be made about an overwhelming majority of debt instruments:

The problem with CDS is that it's essentially a "teeny" (way out of the money) option – the very option that the Black Scholes model prices poorly.

Every lender is short a put. The better the security and the "better" the covenants, the harder to understand the value of the put, and the easier for people to tell themselves the risk is low. This isn't a derivatives thing.

Gary May 23, 2009 at 12:30 pm

Methinks:

If you've ever played poker, you'll know that you can make the right choice (make a bet with a probability of winning of 60%, for example) and lose. With the "jump off a cliff" metaphor, you're assuming what you're setting out to prove – that the choice to take risk was a bad one. I'm not so sure.

What's so special about private firms? Why wouldn't a private owner see that his friends in other firms are winning big by taking big risks, and choose to take huge risks to keep up? If your answer is that his incentives are aligned with the long run success of the firm, you're just saying that the difference between him and a shareholder in Bear Stearns is that the shareholder in BS was diversified. If that's the case, it could have made great sense for the shareholder to pressure BS to take great risks while also investing in companies that were lower risk. And, yes, it would have been right for the managers to take the amount of risk the shareholders demanded.

Also, if taking huge risks is so irresistible when others are doing it, why didn't every company do it (supermarkets, clothing chains, airlines, etc.)? Again, could it be rational for investors to want to take large risks in some sectors and maintain safer positions in other sectors?

Mandeville May 24, 2009 at 8:59 am

Under true capitalism there wouldn't be business cycles or the risk of systemic failures. The first problem is that our banking laws are the equivalent of a legal Ponzi scheme (fractional reserve banking). These laws don't apply anywhere else in the economy, but they are necessary for politically desired credit expansion, which is the second problem. You can't have different property laws for different industries, but that is what we have.

What credit expansion (circulation credit) or monetary expansion does is to send false signals to entrepreneurs and investors of capital that there exists a demand for something that doesn't really exist in the absence of the credit expansion. New money does not increase the pool of available capital goods nor does it contribuite to the intensification of the division of labor required for the creation of wealth. It takes saved capital that would be waiting to be efficiently invested and steers it to projects that turn out to be unsustainable once the credit expansion ends. This is mal-investment, and the "boom" that we experience was really a squandering of existing capital (capital consumption)rather than a result of the creation of new capital. This is evidenced by rising prices instead of what should be lowered prices. A true boom manifests itself with prices for everything dropping as the purchasing power of the currency increases.

Keep in mind that if Bernie Madoff were a bank, he'd probably have done nothing illegal. I'm sure he had at least 20% of his depositors money in reserve and if like for banks the investing public had been conditioned to have "confidence" in his Ponzi racket by the combination of both explicit and implicit federal guarantees, perhaps there would never been a "run" on his funds.

When people don't understand the true reasons for systemic failure, they will dissect the issues like the posters here are doing, but here is a broad answer that should be taken into consideration. When there exists opportunity to make enormous profits through leverage and the legal apparatus is structured to limit one's liability to their investment only (thank you bankruptcy law) people can walk away from situations without having to make whole eveyone they borrowed from–so why not roll the dice?

The solutions to this mess don't lie in regulating behavior under the current property laws, but in reforming the underlying property law itself. (fat chance)

We should be looking at abolishing the legal status of limited liability and the forgiveness of debt through banruptcy law. We should in addition reform fractional reserve banking. These changes would immediately solve the problem.

Ray Gardner May 24, 2009 at 11:48 pm

this raises the question of why these institutions have both stakeholders with such conflicting goals.

Keep in mind that too much of one will scare off the more prudent of the other.

Methinks May 26, 2009 at 12:17 pm

With the "jump off a cliff" metaphor, you're assuming what you're setting out to prove – that the choice to take risk was a bad one. I'm not so sure.

Yes, I've played quite a lot of poker actually. In fact, trading is pretty much like playing poker all day. Even if a trade has positive expectancy, you may lose on the trade. But, if you enter only positive expectancy trades, you will win some and lose some but over many many trades you will realize that positive expectancy – just like in poker.

The trades people begin to do in the midst of the frenzy are no longer positive expectancy or are no longer smart. For example, the trades no longer have positive expectancy but people are hoping they work out or they play stupidly – They bet everything on one hand. That's what was happening. Taking risks is one thing. Doing stupid, undisciplined things is another.

Private firms have more control over who is invested, never grow as large as public investment banks and if they blow up, it doesn't become a matter for the government. They don't make inherently better decisions (almost all hedge funds are private firms but have been blowing up all over the place) but they are free to take bigger risks and the losses are more contained. Wall Street firms are big risk takers and that's just not a model suited for a public corporations, IMO.

Also, if taking huge risks is so irresistible when others are doing it, why didn't every company do it (supermarkets, clothing chains, airlines, etc.)?

I do not know. Perhaps they lacked the opportunity. Likely, they lack the opportunity. Perhaps nobody would allow them to lever up. Keeping in mind, that the problem WASN'T that funds or banks held CDOs. The problem was that they levered those positions 10 to 1 – so a 5% decline in the price of the asset represented a 50% hit to the portfolio. Perhaps some people are more risk averse and don't care if it comes at the expense of being able to attract fewer investors – clearly a minority position.

Gary June 2, 2009 at 7:09 am

…if you enter only positive expectancy trades, you will win some and lose some but over many many trades you will realize that positive expectancy – just like in poker.

Right. Now suppose I'm bankrolling several poker players. I would ask all of them to avoid negative expected value bets, but I might encourage one or two of them to regularly make large bets even when their chances of winning are barely greater than 50%. By following my orders, they will frequently get wiped out of games. I'm okay with that, because I've instructed my other players to make smaller bets to ensure that they stay in games. That means I'll make steady gains from the low-risk players and live long enough to see my risky players get the infrequent but huge wins to cover their frequent losses.

Why not view an investor with shares in Safeway, Gap, Boeing, and Bear Stearns like the poker bankroller?

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