THE PROBLEMS WITH RISK/REWARD

Here's to your favorite politician - ball player- and the guy or gal who is investing your pension money. Hopefully, they understand the principle of risk/reward (R/R) as well as their assumed responsibility to the rest of us.

I truly believe in the risk/rewards - if applied correctly. It's a time worn familiar concept that asks one to employ both affect and cognitive (both their conscience and their brain) as they ask themself : "Is the reward worth the risk?"

We see R/R demonstrated early on by young children. Most kids are pretty good at deciphering the difference between right and wrong behavior. However, some - despite knowing the difference - are willing to take the risk and "test the system". If we fail to teach them there are punishment consequences - we're going to be drinking a lot of wine during our child raising days.

The principle of R/R is as old as dirt and includes various disparate risks - some historical: Charles Carroll of Carollton, confirmed his disrespect for King George, by affixing his signature to "The Declaration of Independence" in bold cursory -address included - then declaring: "They cannot mistake me now!"

R/R has many biblical roots too. To cite just one, in the The Book of Daniel - Chapter 3 - three individuals: Shadrach, Meshach, and Abednego successfully took on King Nebuchadnezzar's worship practice edict by volunteering to enter his fiery furnace to prove faith in their God. This worked too.

But, what if  R/R is apparently not as risky as one might think?

Frequently, we read about various people on Wall Street who pursue and often achieve spectacular monetary gains (reward) despite the inherent possibility (risk) that they and their families may face temporary major disgrace and - huge fines.

Apparently, what they don't fear, is going to jail - a powerful deterrent to most of us as we weigh the pros and cons of our actions (pun intended).

Two recent examples.The hedge fund SAC Capital Advisers, founded and managed by Richard Cohen - one of the wealthiest people in our country -was recently indicted by the SEC for insider trading in a huge case.

Cohen, the guy in charge, was indicted for "administrative charges" (translation: loose supervision), but the "civil" action did not accuse him of "insider trading". No jail time.

If Cohen was knowledgable of the insider trading activity - as is widely suspected due to his position in the firm as well as the industry - but is not indicted on insider-trading charges - could you reasonably conclude this might well be a classic example of successful "risk-reward" activity?

The above is not unusual in how the SEC is dealing with so-called "white collar crime." They recently successfully took on a low level executive at  Goldman Sachs and he was found liable for fraud after a two week trial in Manhattan. That's the good news.

The bad news? The SEC negotiated a $550 million civil settlement with Goldman Sachs but did not charge senior executives with anything.

Some in the industry claim, "It was an implicit bargain between banks and regulators in which the SEC did not charge senior executives of banks, such as Goldman, if the company was willing to pay a large settlement to help recoup investors losses."

 One law professor said, "They gave up the office boy instead." A spokesman for a non-profit that advocates for financial reform stated, "They're laughing in the executive suites of Wall Street."

So, why did nobody go to jail  - the assumed risk part of R/R?

A Columbia Law School professor may have the answer: "They (the SEC) never would have gotten the $550 million if they had gone after senior executives."

The reasoning is that the senior executives would have had the SEC tied up in court for months or years and one assumes their employer would have paid their legal bills.

In a recent blog I reported the SEC plans to get tougher on financial fraud. That's tough? What do you have to do wrong in that business in order to get jail time?

The moral? Kids - just like grown ups - will do the damnedest things if they know the consequences of their actions will receive little or no punishment. Just pray those kids don't end up on Wall Street.

But, then again, maybe by then the SEC will finally get it together.