Imagine if you borrowed money from a hundred investors to bet big on a horse race. And then, as the race was underway, and your horse was trailing by a head, your backers decided to collect on their loans, with interest, one by one. Would you still stand to win even if your horse did?
Noting that investment banks are organized gambling, James Surowiecki points out that for investment banks, “going public…meant exposing themselves to a minute-by-minute referendum…on the health of their operations.” Which is to be expected, he adds, since they were betting with other people’s money.
In the same issue of the New Yorker, Nick Paumgarten describes credit-default swaps and related instruments as the products of magical thinking.
It might be a good time for an adaptation of The Rocking-Horse Winner.