Andy Beal shows how bankers should gamble

April 5, 2009

I love the Forbes profile of Andy Beal, the Texas banker who — much more than say Warren Buffett — is an expert at making billions by zagging when everybody else zigs.

By September 2004 Beal Bank’s assets had climbed to $7.7 billion. Then Beal stopped buying, letting his loans run off. By September 2007 assets had shriveled to $2.9 billion, one-fifth of which was cold cash. He was worried that consumers had taken on too much debt and money was being lent to companies for next to nothing. “Every deal done since 2004 is just stupid,” Beal says…
Beal started coming to work at 10:30 and leaving at 2:30. He challenged colleagues to backgammon games and took hour-long lunches, complaining of being “bored stiff,” recalls one frequent meal companion, real estate investor Steven Houghton…
The credit rating agencies started pestering him about his dwindling loan portfolio. They never downgraded him but scolded him for seeming not to have a “sustainable” business model.

Beal’s assets are back up to $7 billion now, and he sees them going as high as $30 billion before this is all over. He’s the sole shareholder of his bank, and could end up the single biggest winner of what he sees as a “depression, without bread lines this time, thanks to the government safety net, but with equal cost to society.”

The article is almost embarrassingly laudatory: there’s not a hint that people might demonize Beal for profiting from the misfortune of others. I’m a fan of vulture investors — I think they perform an important service, and are crucial providers of liquidity — but I know that I’m in the minority. And Beal is one of the biggest vulture investors in the world right now.

Incidentally, Beal is also living proof of why it can be a good idea to play the lottery. He does it with a lot more money than most of us have, of course: an entire book was writen on how he lost millions in Vegas playing poker. But it seems that whenever he wanted to gamble, he went to Vegas. When he wanted to bank, on the other hand, he looked carefully at the loans he was offered, did his due diligence, and came to a professional conclusion about whether the yield justified the risks. With all his gambling desires being taken care of in Vegas, he didn’t sublimate them into the hope that cheap loans would turn out to be good.

Maybe this is the real reason why bankers should go to Vegas. Not because junkets are good for the economy, as Ben Stein might have it, but rather because it gets the gamble out of their system, leaving them sober when they get back to work in the real world.

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