The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails

The Cause of Failure

One key lesson of the credit crisis is that moral hazard is a distinct, and pervasive, part of Wall Street’s culture. Perhaps, the systemic risk regulator created after the credit crash will help control risk taking, but it is hard to forget that the U.S. Federal Reserve and the SEC dispatched staffers to banks to monitor operations during the worst of the credit crisis. It is not clear that anything productive emerged—other than allowing bank executives to claim that everything was copacetic because of the prudential supervision.

It’s ironic, but moral hazard first entered the financial lexicon through fire insurance. According to Black’s Law Dictionary, moral hazard’s definition is:

The risk or danger of the destruction of the insured property by fire, as measured by the character and interest of the insurance owner, his habits as a prudent and careful man or the reverse, his known integrity or his bad reputation, and the amount of loss he would suffer by the destruction of the property or the gain he would make by suffering it to burn and collecting the insurance.

The definition seems to broadly apply to much of Wall Street’s behavior prior to the credit crisis. It is not clear—though it is not very likely—if the behavior has fundamentally changed since the last crisis ended. The financial market and all of Wall Street is a distinct culture with its own rules, and social mores. There is a ruthlessness, and way of doing business, that is distinctly Wall Street, ...