Financial moral: Those who don’t take precautions have to face the consequences Breakingviews.com | Hugo Dixon The biblical parable of the 10 virgins is sometimes used to make a financial moral: those who don’t take precautions have to face the consequences. If only the real world were like this. In fact, as the credit crunch has shown, foolish virgins get bailed out. “Wise” ones end up paying the price. Here’s a re-telling of the story for modern times. The first virgin was Stan. He ran an investment bank. He took big bets with its cash. For a few years, he made good profits. But then the bets turned sour and the firm took a $8.4 billion (Rs33,180 crore) hit. Luckily, Stan had a nice board of directors. They said he could take with him all his stock awards and benefits from previous years—without any deduction for the new losses. Stan retired to the golf course with $161million in his back pocket. The second virgin was Rock. He borrowed lots of money short-term because it was cheap—and lent it out for long-term mortgages. He pocketed the spread. That was very profitable for a few years. But then funding dried up. Fortunately, when he ran out of money, a charming man from the British government called Alistair was able to provide £56 billion (Rs4.3 trillion) through loans and guarantees, an offering of £1,000 from every man, woman and child in the land. The third virgin was Chuck. He played a clever scheme by lending money without it appearing on his bank’s balance sheet. Better still, he copied Rock’s trick of borrowing cheap short-term money and investing it in better yielding long-term assets. Chuck was so happy he couldn’t stop dancing. But then the music stopped. Chuck lost his job but not the fat bonuses he’d collected in previous years. The fourth virgin was Fannie. She was in the business of lending people money to buy houses. But she was imprudent with her sums: she didn’t put aside enough cash to back those loans. She’s not too worried though. If the worst comes to worst, Fannie’s rich Uncle Sam will be sure to come to bail her out of all her troubles. The fifth virgin was Hedge. It was a nickname from his favourite game—“Hedge I win, tails you lose”. He ran a fund. The deal with investors was that every year he made them money, he would keep 20% of the profits. For several years, Hedge made a packet. But then, in one big bet, he lost much of his investors’ money. Of course, he didn’t refund them 20% of the losses. There were five other virgins. They worked hard in industry rather than finance, saved rather than borrowed, paid their taxes, didn’t speculate on subprime mortgages and didn’t run hedge funds. They didn’t get fat bonuses either during the bubble or during the crunch. But they weren’t running risks— or, at least, that’s what they thought. The snag is, after Ben and his French buddy, Claude, started spraying around cheap cash to bail out Stan, Rock, Chuck and Fannie, inflation started seeping into the economy. That eroded the real value of the “wise” virgins’ savings. In the Bible, the bridegroom only allows the wise virgins to come to the wedding feast. The foolish ones are shut out. In this financial version, all 10 virgins are invited. The bridegroom looks around the room and scratches his head. Which are the real fools?