Before the 2008 financial crisis, one of my neighbors took out a home-equity loan from Wachovia, paying around 5%. Wachovia never sent an appraiser to the house, but that isn’t the weirdest part of the story. My neighbor asked his financial adviser what to do with the money left after he’d paid some expenses. The adviser suggested a money manager who guaranteed 12% returns, explaining “you’re borrowing at 5% and getting paid 12%—you’d be stupid not to do this.”
It was stupid, all right. The money manager was buying homes and hockey teams, and his Ponzi scheme soon collapsed. No warning label said: “The more enticing the interest rate, the higher the risk.” Risk is often nebulous, hazy, unmeasurable—so it is usually ignored. Years of zero interest rates have caused havoc, but with the Federal Reserve raising short-term rates, investors should be extra careful shuffling money around.
Bernie Madoff promised an 11% average annual return and faked brokerage statements before he made off with investors’ money. You can almost hear the cocktail-party conversations in New York and Palm Beach: “You’d be stupid not to do this.”
Same for the crypto scheme known as Anchor Protocol, which offered 19.5% yields—practically screaming risk—with tokens backed by nothing but hot air. It soon imploded. So did crypto hedge fund Three Arrows Capital whose founder told the Journal, “The Terra-Luna situation caught us very much off guard.” The word lunatic is too kind.
Recently, bankrupt crypto lender Celsius was offering interest of up to 18.6% annually to attract deposits. Celsius’ assets reached $25 billion last October. You would have been stupid not to invest—except, well, the company now has $4.3 billion in assets and $5.5 billion in liabilities, mostly owed to depositors.
It reminds me of July 2007, when Citigroup CEO Chuck Prince told the Financial Times, “As long as the music is playing, you’ve got to get up and dance. We’re still dancing.”
