Stop crying me a river – you took on the risk now deal with the consequences.

Stop crying me a river – you took on the risk now deal with the consequences.

As you may have noticed I run some advertising on my site. I try to keep the obnoxious factor to a minimum and generally only accept sponsors from sites that won’t offend me or my readers. Well this last week I received a sponsorship offer from a website that is all up in arms about Argentina defaulting on a bunch of it’s loans to the international community. They have an online petition and are selling it as Argentina is stealing from teacher’s retirement funds. I ended up turning down the sponsorship offer and here’s why.

I don’t know a whole lot about the situation, but I’ll be surprised if I’m far off. A bunch of people who had their money in emerging market funds (extremely risky) lost a bunch of money on paper when Argentina decided not to pay back a bunch of it’s bonds in 2001. Now they are trying to swell up enough support here in the US so that the US government scolds Argentina about defaulting on its debt and according to their pipe dream would then go ahead and pay back the debt.. Their poster child is the teacher, because well people like teachers and firefighters and the such so if they are losing money it should have more of the shock factor, even though I’m sure the VAST majority of the emerging funds investors who actually lost the money were hedge funds and large institutional investors. So that is one reason I turned down the ad, because I don’t think it’s the poor teachers who really lost their butt in this deal.

Second while I admire the fact that they are trying to get their lost money back, I really could care less. They made a risky investment and it didn’t work out. It happens every day and whether the company goes bankrupt, a government rule gets changed that is devastating for your company, or some debt you own doesn’t get paid back it’s a risk you willingly took on when you bought the investment. I doubt they were complaining when they were getting I’m sure a very high rate of return on the debt in the first place. So if you are going to play with fire don’t come crying to me that you got burned. This is also why one of the very first rules you learn when you learn anything about investing is to diversify. Don’t play by the rules, get greedy, and you really should get burned like this. Granted defaults like this don’t happen everyday, but it’s not like it was unfathomable that it would happen. Same with all the people who have their money invested in China or Iraq or any other “emerging” market, you could very easily lose every single penny you invested over night, because these countries are very unstable and don’t necessarily have to play by “the rules” that you want them to.

Right after we take care of your little Argentina problem, maybe we should set up a charitable donation drive for New Century and all the poor sub-prime lenders who lost a heck of a lot of money when their borrowers (I bet some of them were teachers too) refused to pay back the debt they promised to pay back. Or how about the investors who owned Etoys (ok I confess I owned shares back the early days of me trying to figure out the stock market) or any other vapor-ware tech stock from the late 1990s. Why should we care or reward someone for making a stupid decision in the first place. This is exactly how capital markets should work, you got more return for taking on the risk, and well this time the risk side won out. Defaults happen and probably should happen, if you don’t like defaults then invest in a more stable and accordingly lower return bond, but don’t come crying to me because you bet all your money on Red 9 and lost.

So as much as I like getting money to help offset the cost of running this site, I didn’t feel right having an ad like this on my site. What are your thoughts? Am I being too harsh on the people who lost some money due to the default.

  • j2r

    I commend you for not having any cash advance sponsors on your site. I’ve noticed some personal finance sites with these ads.
    And I thought it was really messed up. To give financial suggestions and at the same time having cash advance sponsors.

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  • CMB

    You got it right. Ignore the whiners. Anybody who was dumb enough to buy emerging world debt without a risk premium needs a lesson, and anyone who got the premium has no right complaining.

  • I am much against bail-outs and the like. In fact, I just wrote a big post about how the brewing sub-prime bail out is a really bad idea.

    HOWEVER, I think you got this one wrong. You may not like the tone of the ads, but these guys are people who are trying to get back money that they invested. It doesn’t sound to me like they are asking for a bail-out. All their asking for is that Argentina respect its committments. Is that a bad thing?

    Sure, they took a risk with their money. I am sure most of them were diversified (especially if they were institutional investors), but that doesn’t give Argentina the right to just walk-away from its debts…

    I am not really sure what your concern with this effort is. As far as I can tell these are creditors asking the borrower to pay back what he borrowed. How is that wrong?

  • anon

    But Argentina defaulting on its debts IS the risk. Everyone knows that such a country is more risky than say, the United States. There’s a reason we have rating agencies that try to distinguish between different types of bonds.

    (Side issue: I remember reading in a Frank Partnoy book about various forays into foreign markets, with derivatives that were “disguised” as bonds. The main theme of the book was that investors often do not know what they’re buying, and so these Argentinian investors might not be quite as guilty as they seem. An example closer to today would be many people who had invested in seemingly safe securities — pension funds or corporate bonds — which unbeknownst to the main public actually had significant money tied up, directly or indirectly, in subprime mortgages.)

    As for bailouts I’m really curious about why anyone says bailouts are a good idea. Oddly, they aren’t uncommon in history. Actually, for large corporations or banks, they’re the rule rather than the exception. But why?

  • So, by that rationle, if any risky investment (which by that definition is anything that is not FDIC insured) goes bad, investors should not attempt to get their money back?

    Yes, the risk was Argentina defaulting. But does that give ARGENTINA the right to just default and walk away without its creditors trying to do something about it? I really don’t get the argument.

    BTW, regarding the bail-out question, there are some cases in which bail-outs are justified in my opinion. Those include:

    (i) situations where if a firm is allowed to fail the implications for the national economy are unacceptable – such as the bail out of the hedge fund LTCM a while back; and

    (ii) situations where a lot innocent bystanders will be hurt in an unacceptable way. For example, the failure of a large employer through some sort of natural or man made disaster (e.g. airlines after 9/11).

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