Is greed good? Lessons from a reformed Gordon Gekko

Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. — Gordon Gekko, Wall Street (1987)

When I was away, it seems greed got greedier. The mother of all evil is speculation, leveraged debt. The bottom line is borrowing to the hilt. And I hate to tell you this: it’s a bankrupt business model. It won’t work. It’s systemic, malignant, and it’s global, like cancer. — Gordon Gekko, Wall Street 2 (2010)

Gordon Gekko is back on Wall Street … or at least in Oliver Stone’s portrayal of life on the avenue of dreams and debt. Gordon Gekko is responsible not only for the layman’s knowledge of insider trading but also an icon for rookie stock-market frat boys. Think of the 24-year-old in the cheap suit who fetches coffee for his boss. Yup, that one.  

The legendary corporate raider and the world he lives in has clearly changed after his long jail sentence. Nothing says it like a cell phone, I guess. The transformation is symbolic of the dawn of a new era in the bulls and bears.

The ’80s was the era of unbridled capitalism. Gold bathtubs, anyone? Home gym inside private planes? Everything was there. Money became democratic. The old rich relied on the new kid. This transfer created a ball of power. There was a belief that greed within a capitalistic free market system was the seed of innovation and progress. Without greed, society would stagnate and decay. As a result of such raw and unrefined thinking, the world lionized the likes of Gordon Gekko. This kind of unrestrained desire for material wealth creation led to the extreme, excessive risk taken on by the financial industry and culminating in the global financial crises in 2008 and 2009 with the fall of “A-rated” institutions such as Lehman, Bear Sterns, AIG and the rest of the financial industry.

Gekko may have mellowed but his stripes are still there. Gekko is a man who has had time on his hands. I have always said that time is the most precious commodity we have. We are born with only a finite amount, what we do with that commodity defines all else, and it stops for no one. The one thing you can’t buy. Gekko used his time well in jail to rethink his paradigm of avarice. He sought to develop a more balanced, shrewd but cautiously optimistic Wall Street man that perhaps symbolizes the extreme but acceptable edge of personified human appetite.

No spoilers here because if you have not seen the movie yet (it’s been out for five days), then you’re just not that hardcore. I wont be ruining anything for you then.

Gekko summarizes the collapse of the financial markets in a scene where he gives a speech to Fordham University students:

“Hedge funders were walking home with 50, 100 million bucks a year. So Mr. Banker, he looks around and says, ‘My life looks pretty boring.’ So he starts leveraging his interests up to 40, 50 to one, with your money, not his, because he could. You’re supposed to be borrowing, not them. And the beauty of the deal: no one is responsible because everyone is drinking the same Kool-Aid. Last year, ladies and gentlemen, 40 percent of all American corporate profits came from financial services. Not production, not anything remotely to do with the needs of the American public. The truth is we are all part of it now. Banks, consumers, we’re moving the money around in circles. We take a buck; we shoot it full of steroids. We call it leverage. I call it ‘steroid banking.’”

While the ending of the movie left much to be desired, I couldn’t help but think of writing an article that would help draw lessons from the movie that would be useful for aspiring entrepreneurs:

1. Never put all your eggs in one basket! Jacob Moore (played by Shia La Beouf) reinvests most of his US$1.45 million bonus into one stock, the stock of his employer Keller Zabel. While such diehard loyalists are surely worth their weight in gold, such poor investment allocation (or lack thereof) can only be called stupid. Always diversify to avoid losing your shirt, pants, and the kitchen sink.

2. Don’t be duped into Tulipmania. One of the most memorable catchphrases in the movie was “Green is the new bubble.” Due to large and seamless global financial markets, trillions of dollars flow around the world looking for the next big idea. Every time there is a new trend, it is easy for an overflow of capital to come in and provide an oversupply of money. For emerging or early-stage sectors, this can create artificially lofty valuations (too much capital, too few deals), which create the bubble effect. Don’t be the last one holding the bag. To be sure, don’t join that particular play.

3. Speculation is the mother of all evil: leveraged debt. Leveraging is good. Over-leveraging is disastrous and, depending on the scale, takes the system and innocent bystanders along with it. Always maintain a healthy debt equity ratio and debt service coverage ratios. Don’t use speculative income to finance debt. Don’t borrow to invest in speculative deals. Avoid banking with institutions that are not by nature and practice conservative.

4. Don’t be a sucker. Know what a moral hazard is. “It means they can steal your money and no one is responsible.” “Moral hazard” basically means that a party (or person) may behave differently due to the fact that they are not exposed to the entire risk or consequences of their actions. This leads to personal acts that by definition are moral hazards. For example, if you insure your car, you may begin driving faster or more recklessly as you know the insurance company will pay for the repair of the damages.

5. The devil is in the details! When Jacob Moore and his girlfriend (Gordon Gekko’s daughter) believe they are transferring $100 million in trust to a clean energy company, the money mysteriously goes to Gekko (so that he can fund his comeback). Always check the documentation. Look at the details. This will ensure the transaction is executed properly. If you don’t look at the details, you will get screwed one or too many times.

6. Have a winning attitude! Gordon Gekko explains that “no one likes a crybaby.” Take a loss like a champ. Win graciously. Your attitude during times of crisis will define you as a person and a leader. In some cases attitude (or mindset) is everything. If you don’t adopt a winning mindset, you have lost before you have begun.

When dealing with business partners, investments or deals, always know where the moral hazards may lie.