January 2013 - Bankers Anonymous

January 31, 2013April 4, 2014

The USA of I.O.U.

Every once in a while I read a finance article that sticks in my head and never goes away. An article about the historical intersection of debt and the United States from the New Yorker from four years ago by Jill Lepore is just one of these.[1]

The USA of IOU

Jill Lepore’s article explains that in many ways the United States was founded of the debtors, by the debtors, for the debtors.

We know from English literature that the United States represented a fresh start for insolvents from the lower and upper classes, which makes sense when we learn that both Dickens’ father went to debtor’s prison and Trollope’s father fled England to avoid it.

What I didn’t know is that as many as two-thirds of Europeans arriving in the Colonies were debtors, paying their way as indentured servants. The colonial governments of Virginia and North Carolina for their part, eager for laborers, passed incentives by promising 5 years’ worth of debt protection. The founder of Georgia, James Oglethorpe, specifically started the colony as a debtor’s refuge in 1732, as an alternative to English debtors’ prison.

Lepore makes the interesting comment that Founding Fathers Jefferson and Washington were so up to their necks in debt to London bankers that the Declaration of Independence from England not only served democratic Enlightenment ideals but also their own balance sheets.[2]

Debtor’s prison

Before reading Lapore’s article I had no idea that the English tradition of locking up debtors in prison jumped the Atlantic and came to the American colonies and the young United States. Debtors through colonial times and the first 40 years of the Republic routinely got locked up in brutal prisons, – often for very small amounts. There the debtor would stay, half-starved and dependent upon alms from passers-by, until someone – usually a relative – paid the debt.

New York became the first state in the nation to outlaw debtors’ prisons in 1831, paving the way for other states to follow suit.

Debtors’ prisons largely predated proper bankruptcy law, which makes sense as bankruptcy would always be preferable to prison.

Bankruptcy for Traders vs. Everybody Else

You are not going to believe this[3], but in the 1800 to 1830 period, financial traders typically received preferable treatment, by law, over everybody else, when it came to insolvency.

If you were a stockbroker in 1800s Wall Street, for example, or you engaged in financing merchandise shipping and trade, or trading in agricultural commodity futures[4], you could declare bankruptcy if the business went awry. But, if you were not a financier, you had no way of getting clear of your debts, and you might face debtors’ prison.

In essence when debts became overwhelming, Lepore explains, a bankruptcy law in 1800 allowed financiers to declare bankruptcy and receive a fresh start, freed of their debts. Presumably lawmakers justified this disparity through a logic similar to today’s “Too Big To Fail” principal. If the brokerage houses in turn of the 19^th Century Wall Street couldn’t work through their financial distress, well then my goodness, what would happen to the economy????[5]

Since the bankruptcy law only applied to traders, everybody else was liable to be thrown into debtors’ prison. Indefinitely, in fact, until their debts got paid. Not until 1841 did Congress pass a permanent bankruptcy law so that ordinary folks could declare bankruptcy in the event of insolvency.[6]

So, if you were wondering whether the bailout of Wall Street in 2008 while Main Street suffered represented the nadir of financial inequality and injustice, you’d be wrong. Early 19^th Century injustices were even worse. There, doesn’t that feel better now?

[1] Here’s a Scribd link to the article as well.

[2] Before reading Lepore’s piece I knew about the historical train of thought that the Founding Fathers were greatly motivated by selfish private interests, such as keeping taxes low and protecting their own private property, something that British sovereignty increasingly impinged upon in the years leading up to the Declaration of Independence. As a recovering banker, however, I find the we’re-up-to-our-necks-in-debt-let’s-cut-ties-with-our-bankers argument plausibly intriguing. I’m sure Jefferson and Washington were great guys and all, but any time you can simultaneously establish a radical new experiment in non-Monarchical government based on Enlightenment ideals and wipe out your personally huge debts at the same time? Wow, I mean, that’s a two-for-one. You kind of have to do it.

[3] Yes, that’s sarcasm.

[4] Yes, the concept and use of commodity futures are not hundreds, but thousands of years old.

[5] Does this sound familiar to anyone?

[6] Lepore relates the story of a clever insolvent who found a loophole in the bankruptcy law of 1800 that offered unequal treatment between traders and everyone else. With extraordinarily large debts that had previously landed him in jail, her hero John Pintard managed to get a temporary reprieve from prison through a loophole in the debtors’ prison laws. He took out an advertisement in a newspaper that he was doing business as a stock broker. Pintard then traded a single stock, pocketed the fifty-eight cents profit (later donated to charity), and filed for bankruptcy as a trader.

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January 23, 2013April 4, 2014

I Miss The Great Recession Already

I’m just going to come out and say it, ok? I miss the Great Recession already.

I miss it for two reasons: first as an investor and second as a human.

The Investment Side of the Great Recession

As an investor, the Great Recession represented the good times, now past.[1]

Recessions – or at least their financial unfolding via changes in asset prices – cause not only wealth destruction, but also wealth creation. For investors[2] in particular, a recession is often necessary in order to deploy capital at attractive prices.

Warren Buffett famously gets irritated about the lack of investment opportunities in his annual Berkshire Hathaway letters during boom times, like his 1999 letter[3] and 2007 letter,[4] because prices of public securities outpace intrinsic value. Conversely, he gets very busy and active buying companies when prices drop and other investors flee. Recessions for Buffett, as well as for many investors, represent the best time to accumulate wealth. Which is why he famously says:

“Be fearful when others are greedy, and be greedy when others are fearful.”

Another famous value investor, Shelby Collum Davis,[5] said more pointedly:

“You make most of your money in a bear market. You just don’t know it at the time.”

If you believe Buffett and Davis, as I do, then you too will think wistfully of the Great Recession because, as an investor, the good times are in the past. Now, with US equity indexes up over 100% from their March 2009 lows, investing consists of purchasing expensive assets and hoping they get more expensive. Which has a lot more to do with gambling than it does with investing.

The Human Side of the Great Recession

Of course this may sound awfully callous from a human perspective, and I don’t mean to diminish the real human suffering of the Great Recession. In fact, on the contrary, it’s the humanity that emerged during the Great Recession that I want to call attention to, as the part I’m going to miss the most.

Remember when your 401K lost 5% of its value every month – month after month after month – between August 2008 and March 2009? Remember that you just stopped regularly checking its value – or any part of your supposed net worth – by about December 2008, because the whole thing just became too painful to contemplate?

At that moment, falling into the Great Recession, we all confronted, in our own way, the painful reality that our human worth had to be something other than our financial net worth. Because otherwise we just became half of who we were.

Remember when in the space of just a few short months either you – or someone you knew well – lost a job, a house, or a business?

As awful as that was, our collective acknowledgement of suffering changed the way we acted on a daily basis. For people relatively well off, the new austerity forced a kind of back-to-basics approach to living. Luxury consumption plummeted, and staycations soared in popularity, if only out of solidarity with those who suffered even more.

I personally lost money in the Great Recession. But what turns out to be even more painful, as a fiduciary, is losing other people’s money. I dreaded calling investors on the phone to report a loss, and I dreaded, worse yet, seeing them in person. To make it more painful for me, my investors, unfortunately, were often my friends and family. The thought of it kept me awake and tossing in bed in the 1-3am hours. For a couple of years. Not good times.

Would you like to know what reduced me tears, however? It was the investors who told me it was going to be ok, that they still believed in me, and that the lost money didn’t mean they valued me less as a person. Even as I write this now, it gets a little dusty in the room when I think of that.

There’s a human element that only reveals itself in the bad times.

Laissez Les Bons Temps Rouler

My sense is that sometime between Groundhog Day and Mardi Gras 2013, the Financial Infotainment Industrial Complex will peak out at the nation’s Great Recession shadow, and officially declare the long Winter finally over.

That declaration will signal it’s time for luxury living again and real vacations. Masters of the Universe will know they can safely begin to channel their inner Patrick Bateman in public again.

In that smooth shift from Recovery to laissez les bons temps rouler I’m certain we’ll go back to checking our net worths in the mirror more often, and possibly our human worths less often.

But I hope we’ll hold on to the memory of what we had, and lost, and recovered, during the Great Recession.

[1] I acknowledge I’m being colloquial, not academic, about what I mean by a recession generally or the Great Recession in particular. I don’t mean an economist’s definition of recession, which would refer to changes in GDP. I also don’t mean to quibble about an US equity ‘bear market,’ as it’s been a few years since that occurred. What I really mean is a holistic sense that, with unemployment below 8% nationally and the general level of stocks approaching their 2007 highs, the national mood has swung away from Recession and toward Recovery and I’m confident soon enough we’ll be in Boom Times.

[2] By “investor” I mean as distinct from “gambler,” which is what most of us do when we purchase public securities.

[3] Which I’ve helpfully linked to here, and would call your attention in particular to page 16, in which he anticipates the bursting of the tech bubble and the bursting of the equity bull market in general.

[4] Which is linked to here, and I’d call your attention to pages 18-20 in which Buffett tries to lower expectations for equity returns going forward.

[5] Whose son and grandsons run this firm, Davis Advisors.

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January 17, 2013January 9, 2014

What is Wealthy?

Back when I worked on the bond sales desk at Goldman, many of us talked about what our “Number“ was – the “Number” obviously representing “Fuck You Money.”

“Fuck You Money”, if you haven’t worked on Wall Street, represents the amount of money you’d need in order to professionally disregard anybody else’s needs. In other words, the amount you need to walk away from your desk, go out the door, and never look back.

My sales partner, and friend, who I sat next to on the mortgage bond desk, kept a spreadsheet on his desktop calculating precisely how close he was at any given point to achieving his “Number.“ He’d been at Goldman (and another firm before that) longer than me, and he stayed about 5 years longer than I did. Although I never came out and asked him directly after he left GS, I’m pretty sure he made his “Number.”

I left Goldman in 2004, long before earning my own personal “Fuck You Money.”

Sometime after 9/11 happened[1] I was no longer willing to live an unhappy daily life, focusing on delayed gratification, the key factor for me to accumulate enough for my “Number.”[2]

I’ve been thinking about what it really means to be wealthy for a couple of reasons. One, because its bonus day today at Goldman, and two, because I’m teaching a course this semester on personal finance.

Preparing for this course has pushed me to reflect, before the college students ask me, on the best definition of wealthy.

My answer to them will be something like this:

Wealthy can’t be determined by a single, static, net-worth number, because I know that Mike Tyson at one point earned $30 million per fight and over $300 million in his lifetime, but subsequently declared bankruptcy in 2003. For some people, like Tyson, their number is larger than $300 million, and probably can never be achieved.
What I know from the Tyson example is that on-going lifestyle expenses play a big role in determining whether you are wealthy, at almost any level of asset accumulation. Some people can be wealthy on an accumulated $3 million net worth, while other people can be poor and bankrupt with $300 million in earnings.
19^th Century English authors Jane Austen and Anthony Trollope tell me a great deal about how to understand wealth, and, in particular, the role of passive income. At that time in England, the landed gentry earned passive income from family-owned real estate, real estate which would never be willingly sold.[3] Unlike today, the landed gentry never calculated their net worth in terms of the real estate value, but only in terms of the passive annual income to be derived from the land. Every hero and heroine of Austen and Trollope novels has an income, known to all polite society and expressed in thousands of pounds per year; their “Number” follows them around as they seek appropriate romantic matches. It’s as if they are marriage-seeking Sims with a number floating above their animated-avatar heads.[4]
One meaning of wealthy that exists in our popular culture is that if you are wealthy you never need to work again, like landed gentry. Because 19th Century landed gentry did not work for a living,[5] I like the analogy between the “Number” associated with every Austen and Trollope character, and “The Number” that we think makes us wealthy today. The best way of knowing whether you’re wealthy, by this analogy, is to compare the passive income you derive from your assets on an annual basis with your yearly lifestyle expense. If your passive income exceeds your expenses for the rest of your life, guess what? You’re wealthy! I specifically urge my Personal Finance students to look at it this way because, like the 19^th Century landed gentry, you shouldn’t depend on selling your assets to cover expenses,[6] since that’s a non-sustainable practice.[7]
Time, specifically your expected life span, plays a big factor in my definition of wealthy. If you have enough income or assets to cover your expenses for only the next three years, but you’re only going to live for one more year, you’re wealthy three times over![8] If your passive income and assets are high right now, but will run out before you die, you’re far from wealthy. A young person needs far more passive income and assets to cover them for their expected remaining life, while an older person may be much closer to wealthy – by my definition – as a result of having less time on earth.
Passive income in modern times rarely derives solely from real estate income, but rather comes from many sources such as dividends, business profit-sharing, pensions, annuities, fixed income interest, and social security payments, in addition to traditional, real-estate derived income.

A More Nuanced Version of being wealthy doesn’t involve saying “Fuck You” to work

Hold on there a moment! I’m not done yet with my definition of wealthy. My fullest definition of wealthy adds an important factor to the ‘Do you have enough to walk away from work?’ question[9]. After all, work gives meaning to life. Work grounds us, puts us in the flow of society, and makes us feel useful to others. Work in that sense is a good thing unto itself. So how do I integrate that with my definition of being wealthy?

I think wealthy means not so much having “Fuck You Money,” or reaching your “Number,” but rather having the option to choose work that you would do regardless of the level of compensation.

So here it is, my definition of wealthy: If you have enough assets plus passive income to cover your personal lifestyle expenses for the rest of your life, and that money allows you to work at something you love – without concern for the amount of compensation – then you are wealthy.

Let’s say you love feeding the less fortunate. If you have enough passive income in excess of your expenses that you could ladle soup to the homeless – even though that service pays you almost nothing – then you are wealthy.

If your greatest joy in life consists of reading novels and writing your memoirs every day,[10] and you can live cheaply enough to make that happen for the rest of your life, then you are wealthy.

If you perform eye surgery for a living, and you live for the joy of returning sight to the blind, and you can afford to do so even if when Medicare cuts your reimbursements to one-tenth of their current level, then you are wealthy.

If you would sell bonds for a living, for the sheer joy itself – the act of efficiently allocating capital or whatever you tell yourself – then you don’t care what your actual bonus is today from Goldman. So what if you’re down 25% from last year, or you’re up 100%? Who cares? You love it! If you’d do it anyway, and you can afford to do it, then you are a wealthy person.

If, however, you’re working at something, day in and day out, that you would quit as soon as you made enough money, I would argue you’re far from wealthy. You may be covering your costs and accumulating assets, but you’re even farther from the ultimate goal of wealth than you think.

[1] Which I wrote about here.

[2] Also, I wasn’t the world’s greatest bond salesman, so it was going to take me quite a bit longer than some to make my “Number.”

[3] To sell real estate would be to announce to the world that you no longer belonged to polite society, so in effect the market price of most real property was meaningless and incalculable. Family-owned real estate meant much more than price. To lose your land due to excessive indebtedness, a common theme of these novels, was to lose your place in the world.

[4] The romantic plot of all these novels goes something like this: “Demure Lizzy Bernnet, with her mere 300 pounds per year, could not possibly hope to make a match with the dashing Mr. Farcy and his 20,000 pounds per year. She’ll surely need to settle for the homely parson the widower and his modest 500 pounds per year. But plump narrow-eyed Fanny Bobbins and her 12,000 pounds per year, however, seems to have caught the eye of Col. Wigglesworth and his 1,200 pounds. Oh how happy the Colonel will be with this match!” etc.

[5] Ah, the English ideal!

[6] Interestingly, 401K and IRA rules mandate that Americans withdraw at least some of their retirement savings from their accounts each year, after age 70, in effect forcing us to sell assets to cover expenses. The 19^th Century English landed gentry do not approve!

[7] This issue gets complicated if you consider leaving wealth to the next generation to be a sign and precondition of being wealthy. The English landed gentry did. As an American with “small d” democratic leanings, I don’t. Those of you who have read my previous posts on tax policy may detect a hint of dismay for tax policy which encourages inheritance as a primary means of “getting rich.”

[8] At the extreme example, everyone who is debt free on their deathbed is ‘wealthy’ since they need no more assets or income to cover their expenses.

[9] As a good austere New Englander, I cannot get away from the difference between my home culture and the English 19^th Century ideal of not working. So I need to amend the idea of wealthy so that it does not celebrate idleness.

[10] Like the greatest of all the English landed gentry, Bilbo Baggins, writing the story of his travels as he lives frugally in Rivendell, off Elrond’s largesse.

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January 15, 2013January 15, 2013

Mint the Gold Coin(s)!

Nerdy finance blog nerds, Nobel Prize winners, and political satirists spent early January discussing the Mint The Coin movement, a currency trick to allow the Obama administration a way around the pesky debt ceiling, via a platinum coin with a $1 trillion denomination.[1]

The $1 Trillion coin suggestion came about because the debt ceiling allows Congressional leaders another crack at pushing a fiscal austerity agenda.[2]

What if I told you about a different Mint the Coin movement we can all participate in, that could save $5.5 Billion over the next 30 years that could be applied toward the federal deficit? What if I told you that it wouldn’t cost you or any taxpayer anything at all? On the contrary, what if I told you that your simple actions would actually save $ millions in storage costs for the federal government? Would that be something you’d be interested in?[3]

For the past 2 years, I have personally led my own Mint the Coins movement, by ordering and paying virtually all of my cash transactions with $1 Presidential gold coins.

Because ethically I am a Neo-Kantian,[4] I believe it’s my moral duty to act as a one-person Mint the Coin(s) proponent. If everybody else ordered and used the $1 gold coins, we could all help reduce the deficit at precisely zero costs to ourselves and the government.

I will now admit that when I first began ordering the $1 coins directly from the US Mint, I acted more from a Locke- or Smith-style enlightened self-interest, not Neo-Kantian ethics, as the US Mint created a perpetual airline miles accumulator by offering free shipping for credit card orders.

But even after the US Mint shut down that opportunity for enlightened self-interest, I continued to order the coins from my local bank. My bank teller always looks at me funny when I order the next box of coins ($1,000 minimum per box!) but it’s their obligation to request them for me, for free.[5]

My Sunday night poker competitors know that my buy-in will consist of a $25 roll of Lincolns.[6] Or Jacksons. Or, like a month ago, the dreaded Buchanans.[7] My dry cleaner knows she’s getting the gold cha-ching. The guy at the local coffee place tells me has an entire jar full of my $1 coins. The new bakery, with those amazing scones, gets paid with my special gold pirate booty. In all of my local neighborhood cash transaction, I’m that guy. The gold coin guy.

And I’m the only one in my city of 1 million plus who does this.[8]

By the way, how do I know nobody else uses these $1 gold coins, besides the fact that the US Mint has a warehouse full of $1.4 Billion of untouched, unwanted gold $1 coins?

I know because 99.5%[9] of the time I pay with $1 coins the recipient reacts with surprise[10] and announces a plan to pull the coins out of circulation and save them in a special drawer.

And so, my spent coins never get placed back into circulation. Thereby ensuring the failure of the program. Also, at least as of a few years ago, Americans reported an overwhelming preference for $1 bills, despite the fact that no other country keeps paying such small denominations in bill form.

With the $1 Presidential coin program a flop, the US Treasury announced a roll-back of new Presidential $1 coin minting, following the issuance of the highly sought-after 21^st President Chester A Arthur’s coin.

Oh…it’s a lonely road out here, pursuing my own mint the coin(s) project.

[1] You may have paid attention, or you may not have paid attention to the #mintthecoin Platinum coin movement. Mostly it depends on how much of a nerdy finance blog nerd you really are.

[2] One side claims fiscal prudence, the other side claims ‘hostage taking.’ Can’t we all just get along?

[3] Is that something you might be interested in? It’s so worth your time to watch those scenes from Entourage. But I digress.

[4] How should one act, according to Kant? “Act only according to that maxim whereby you can at the same time will that it should become a universal law without contradiction.”

[5] For that matter, did you know that you can ask your bank to specially order $2 bills for you? They’ll do it for free. Stacks of them. $2 bills are rare now, but they wouldn’t be if we just asked for them at the teller and circulated them normally instead of giving them to our kids under the pillow when the tooth fairy visits.

[6] In a related story, about a dozen guys in the neighborhood regularly find themselves carrying around $25 rolls of $1 Presidential coins. I got poker skillz.

[7] Dreaded because he’s the worst president in history. So I figure it’s only a matter of time before those $1 Buchanan coins trade for less than $1, right? Or have I misunderstood something?

[8] Ok, there’s actually one other guy, who told me about the airlines miles scam 2 years ago. But he and I are it. I’m sure of it.

[9] I rounded down, to be conservative.

[10] And I’d like to think, momentary delight

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January 14, 2013November 14, 2013

Book Review: Fooled by Randomness

Nassim Nicholas Taleb’s book should come with a warning on the cover: “If you are turned off by an arrogant, attacking, argumentative style, you will miss one of the best set of ideas on markets and investing in the last 20 years.”[1]

Now that I have given you, slyly, the same warning, let me emphasize the second part of my warning, because this book rewards the effort.

As in its successor, The Black Swan: The Impact of the Highly Improbable, Taleb tears down unexamined assumptions about the patterns we see in the world. Similarly, Fooled by Randomness
hews to my preferred ‘How NOT To Invest’ rule on useful finance books, rather than the more typical airport bookstore “How To Invest” books that make me want to gag.

Taleb’s writing usefully addresses the question: When you consider investing in a successful money manager, posting consistently high returns over an impressive number of years, is that a brilliant investor or just the result of dumb luck?

Taleb walks the reader through a coin toss experiment which – for me at least – demolishes the typical treatment of the Financial Infotainment Industrial Complex’s celebration of “money manager brilliance,” in one clean hypothetical example.

Take 10,000 money managers, each of whom has a 50% probability of making $10K in a year, and a 50% probability of losing $10K in a year. Any manager who loses $10K in a year gets tossed out of the pool of remaining managers.

At the end of the year, we expect approximately 5,000 money managers will be up $10K , while 5,000 money managers will permanently leave the pool of money managers.

When we run the game for a second year, 2,500 managers remain, each of whom has had a string of 2 good ‘up’ years. After three years we have 1,250 managers, after four years we have 625 managers, and after five years we have 313 managers. In Taleb’s experiment, these 313 managers have managed to post 5 brilliant years in a row, (with no down years!), although we know this is due to the pure dumb luck of the experiment.

As Taleb points out, and we know instinctively from the way the Financial Infotainment Industrial Complex works, these lucky 5-year managers will be hailed for their incisive minds, their vigorous yoga regimen, or their humble and strict upbringing. If they then stumble in the next year, the Financial Infotainment Industrial Complex will point to the outdated approach of their investment thesis or the moral dissipations of their early success. Or whatever. The real truth is, as Taleb says, their luck changed more than they changed.

From a random dumb-luck cohort of investment managers, we can produce, consistently, a number of successful winners (3% in his example, over 5 years) who will receive undeserved accolades, even as their success appears to show a non-random seeming, statistically improbable, string of successes.

It’s easy to parody Taleb’s argument as ‘it’s all luck,’ but it’s more difficult, and more profitable, to examine ways in our own personal and financial lives in which we ascribe too much causality to random events and random markets.

In the simplest but most profound sense, about 99%[2] of the conversations I have or hear about investing, even (especially!) among serious people, invoke causality instead of luck, and see patterns instead of randomness. We say the word ‘investing’ but we really mean, unknowingly, ‘gambling.’

A few other reasons I like Fooled by Randomness:

I love the section midway through Fooled by Randomness in which Taleb describes the successful and personable “Carlos,” an emerging markets bond trader who, throughout a number of years, made $80 million for his bank, with nary a down quarter, only to blow a $300 million hole in his firm’s balance sheet during one traumatic summer of 1998 featuring the blowout of swap spreads, The Russian bond default, and the implosion of Long Term Capital Management. Since I lived and breathed that market, and those years, with bond trading colleagues just like Carlos, I can relate.
I serve as a fiduciary for a school whose endowment matters tremendously for the operation of the institution. One of the never-ending challenges for any fiduciary who shares Taleb’s empirical skepticism is to keep returning to the role of luck and randomness in short and medium-term investment returns. We want to be smart, but part of being smart, according to Taleb, is acknowledging that luck and randomness account far more for success than we prefer to believe. We receive quarterly investment returns from our managers, but the value of that information is nearly zero. It’s just noise. As a natural corollary, decisions about money managers based on relatively short-term investment results should be made with a healthy dollop of skepticism.

Finally, one of the joys of Taleb is that he and his ideas engage productively in a dialogue with other thinkers. Nate Silver’s The Signal and the Noise followed Fooled By Randomness in time but helps build a similar helpful skepticism about what we can know and not know from observable data and phenomenon. The human tendency to see patterns and ascribe causality where none exists can be usefully counteracted through their thinking.

Taleb also explicitly attacks, among numerous others, a book I admire, Thomas Stanley’s The Millionaire Next Door.[3] Taleb argues, correctly, that Stanley’s methodology crumbles in the face of statistical logic.[4] I agree with Taleb on the statistical critique, while I also believe in Stanley’s conclusions and advice on how to conduct one’s personal and financial life.

One can be right for the wrong reasons, as well as wrong for all the right reasons, as I imagine Taleb would heartily agree.

Please also see my review of Nicholas Nassim Taleb’s Black Swan.

Please also see my review of Thomas Stanley’s The Millionaire Next Door

Please see related post: All Bankers Anonymous Book Reviews in one place.

[1] I read Fooled by Randomness when it first came out in 2005. Since then I’ve often reflected on how difficult a job Taleb’s editor must have had. Given the final product, earlier drafts must have been even more outrageously full of slashing critiques of all the idiots and frauds Taleb perceives everywhere. In the forward to the second edition, Taleb acknowledges both his slashing style and his editor’s attempts to tone him down. True to form, he argues his idiosyncratic style makes for better reading. In a weird way, I agree. But at least you’re now forwarned.

[2] I’m rounding down, to be conservative.

[3] I’ll review that one on this site soon.

[4] Stanley attempts to draw conclusions about ‘how to be millionaire’ based on surveys of millionaires. His first problem is that he’s only interviewing a sample of millionaire ‘winners,’ so we really cannot know how many people followed the same exact path but ended up ‘losers.’ He has a flawed survivorship bias – similar to observing the universe of hedge fund managers today and drawing conclusions about the merits of hedge fund investing without taking into account the funds that did not survive. Second, Taleb points out that the time period covered by Stanley’s study was a particular financial and economic moment in time of bull markets and asset price inflation. A different time period might lead to an entirely different set of conclusions about ‘how to be a millionaire.’

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January 9, 2013January 21, 2016

Ask an Ex-Banker: Medical Debt

Dear Banker,

I have a question about medical debt. My 36-year-old sister just suffered a brain hemorrhage, collapsing at work and sent to the hospital. I am happy to say that she is expected to make a full recovery, but the treatment and ensuing hospital stay involved a week in intensive care, a neurosurgical “procedure,” numerous CT scans, and many, many medicines which she will take for months, if not her entire life. Although she and her husband have health insurance, they otherwise live on a very tight budget, and we are afraid of the hospital bills that will result from this incident.

We “heard” that health-care providers cannot bankrupt people who are unable to pay. If they do the best they can to cover the bills but simply fall short, which they most certainly will, on both counts, does some entity absorb the debt that they cannot pay? The government? The hospital? The insurance companies?

I mean, what do they do if the family simply doesn’t have the money to pay for the essential care she received?

Thank you, Concerned Sister (Alexandria, VA)

Dear Concerned,

I’m sorry to hear about your sister’s condition, and I hope she continues to recover.

Your question is a really important one – as extraordinary medical costs often bring on a financial calamity, following directly on the heels of a health calamity.

I read in your question anguish over your sister’s health – compounded by the anguish of financial insecurity for her even after she achieves a full recovery.

A hospital/patient relationship, in my opinion, is distinct from a business/customer relationship or banker/borrower relationship in a way which should change the way debt gets treated.

By that I mean neither the hospital nor your sister had a choice about the transaction. Your sister clearly didn’t choose to get a brain hemorrhage and her choice of treatment – whether made by her or her family – was made under considerable duress. The hospital, for its part, cannot refuse to treat your sister’s condition, despite its cost to the institution, or her likely ability to pay. She has to have the treatment to survive – given the consequences of not getting treated – and the hospital has to treat her, regardless of the financial consequences.

This absence of choice makes medical debt different from, say, ordinary credit card debt.

In my business experience, and indeed in my basic world view, refusing to pay a debt is akin to stealing. You received something valuable. Reneging on payment means you took that valuable thing without paying. This is hard-assed and perhaps unpopular, but that’s my view. Don’t hate me, I’m an ex-Banker.1

Medical debt stands out, however because of the absence of choice between customer and provider.2 Fortunately, most hospitals take this into account and assume a certain amount of financial indigence in their patient population. In other words, most hospitals make a larger provision for non-payment of their bills than a typical business. Traditionally, most hospitals have been run by religious organizations, governments, or universities that consciously blend a financial approach with an ethical non-financial approach to providing service.3

This approach could mean good news for your sister and your family, as the hospital should be prepared for many patients’ inability to pay their bills in full, including your sister’s.

Now, to return to your specific question of what can happen – and what your family should do. It’s a myth that the hospital can’t push your sister into bankruptcy.

Of course they can. Here’s the worst case scenario:

Let’s say she owes $50,000 to the hospital, and she ducks the bill because, as you say, she doesn’t have the money to pay it. The hospital will refer the bill to a collector, who can initiate a letter and phone campaign to get her attention and urge payments. Occasionally this campaign can threaten her employment, and it certainly will put her through considerable stress.

Following continued non-payment, the hospital may refer the bill to a collection attorney, who may take a period of time to sue her in court to obtain a judgment. With a judgment in hand, the hospital can, in most states, garnish her wages 4, place a lien on her home 5, or haul her into a court for a debtor’s exam to disclose her income and assets.

By the time (at least a year from now) that the hospital has obtained a judgment, the amount due will have risen considerably owing to penalties, interest, and lawyer’s fees.

With a court-ordered judgment, her credit will be wrecked so any future borrowing will be either refused or offered at usurious rates.

Needless to say this is a bad place to be in, and bankruptcy could seem like an attractive option for your sister.

So what should your sister and your family do to avoid this?

Up front, you should make an accurate record of her income and assets.

Ideally, for your short-term purpose, this record will show her inability to settle her $50,000 medical debt.

Next, find the highest ranking person in the hospital’s accounts receivable department and plead your sister’s case, offering to pay something monthly that she can actually afford. If that’s $100/month great, but if it’s only $25/month, so be it.

At a rate of $100/month ($1,200/year) that $50,000 medical debt will never be paid in full. That’s ok. At some point, a year or three from now, your sister can return to the hospital receivables department and offer some lump sum amount ($5,000?) based on her tax refund or house refinancing or ability to borrow $5,000 from a bank. Chances are, at some point, the hospital will welcome the partial settlement and offer debt forgiveness on the remainder.

Not-for-profit hospitals, in particular, budget for non-payment by many patients. Many may budget a particular amount of non-payment per year, so forgiving the $45,000 your sister can’t pay in 2013 may be impossible now since it exceeds their figure, but may be possible later because of the budget in a new calendar year.

As a finance professional who dealt with many non-paying debtors, I was always receptive to minimal monthly payments from an upfront debtor who made clear to me that non-payment and bankruptcy represented a much worse, mutually-assured destruction option. If the hospital accounts receivable department acts rationally it will welcome some regular, low payments now rather than engage in a collections fight with your sister that they’re uncertain to get anything from in the future.

I hope that helps and good luck to your sister and your family.

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Of course we can all imagine scenarios in which stealing may be ethically justified, such as a parent attempting to provide food or basic shelter for their minor children. The ethical imperative and human impulse to survive trumps the ethical imperative to not steal in certain circumstances. Yes, I just agreed to accompany my wife to the movie version of Les Miserables. Jean Valjean stole a piece of bread 19 years ago. That’s fine, I forgive him. ↩
The exceptions being optional medical procedures, such as elective plastic surgery. You had better pay for those butt implants in full, or else I will judge you harshly! ↩
It’s also why I have an instinctual aversion to for-profit medical practice. Yes, there may be some additional efficiencies to be gained from market practices, but medical service is not like other services. In the absence of a choice of whether or not to treat your broken leg, or appendicitis, or brain hemorrhage, pure profit motives can create ethical monstrosities. ↩
Not in Texas for example and a few other states. ↩
Not in Florida for example or Texas and a few other states with ‘homestead’ exemptions. ↩