Gambling – the willingness to take actions whose outcomes cannot be known for certain – is a basic human instinct. The riskier you perceive a particular action to be, the higher its potential payoff should be to justify your taking the action.

As it happens, the risk inherent in many actions can be roughly quantified. You can rank actions by their estimated riskiness, compare them to each other and to their potential payoffs, and make intelligent judgments about which (if any) actions to take.

This is known as managing risk. And the widespread failure to manage risk sensibly was a major reason why the financial industry melted down so catastrophically in the fall of 2008. To their peril, Wall Street firms relied on oversimplified models for managing their risk.

Many people insist that financial markets are simply a large collection of gambling casinos that offer investors a variety of “games” to bet on. This is almost right – but the almost is significant.

When you walk into a casino, you face an immediate choice. Are you going to play slot machines and table games like roulette and craps, or seek out the poker rooms?

If you choose slots or table games, you are likely to lose because you are playing against the house. The payoffs of these games are structured (with the blessings of state gaming commissions) to give the house an edge that assures you will lose in the long run. This is unlike the situation in the financial industry.

But if you choose the poker rooms, you have a chance of winning, because you are playing against other gamblers like yourself. The house simply hosts the games (i.e. provides the space, tables, and chairs, decks of cards, professional dealers and so on) and takes a modest cut of the pot for doing so. This is a lot more like the situation in the financial industry.

You can sit down at a table and become a “player” (which is like being a “professional investor” in the financial industry). But you have another option.

You can engage in side betting. People who visit poker rooms simply to watch the games can place side bets among themselves about the winner of the next hand. But since they’re unable to influence the hand’s outcome, their betting decisions simply reflect their estimates of the raw probabilities. These bettors are spectators with no influence over who wins the next hand.

But there are ways to refine your initial assumption about the win/lose probabilities.

One way is to simply watch a half-a-dozen or so hands and see which player or two seem to be dominating, then make a subjective judgment about the player’s probability of winning. Another is to look at the chip stacks in front of each player. If one player’s stack is twice as large as anybody else’s, it may be evidence of that player’s superior poker skills.

But suppose you recognize at the outset that one of the players is Jennifer Harman or some other highly regarded poker maven who tends to win a significant percentage of the hands they play. You reflect this by assigning him or her a higher win probability. You place most of your bets on the maven winning, possibly adjusting the size of each bet based on how well the maven is doing as the game progresses and what kind of payoff odds you’re getting from the other spectators.

An important point stands out about this poker example: You have a relatively large number of variables to keep track of, and their interrelationships and relative impacts are constantly changing.

This is especially true in financial markets. During the years leading up to the beginning of 2008 many firms bowed to the temptation to oversimplify their models. Many of them turned out to be less than worthless when the proverbial expletive hit the fan and blew up the world or at least lit the fuse.

Negative interest rates are widely discussed these days as a monetary policy tool to support economic growth. President Donald Trump is a huge fan of low or negative rates and has been browbeating Federal Reserve Chairman Jerome Powell, whom he appointed in 2017, to cut interest rates to zero or even lower. Powell and his colleagues should think long and hard before capitulating.

The apparent goal is to keep the economy percolating until after next year’s presidential election. The Fed appeased the President last month, making a modest quarter-point cut. Egged on by Trump, they seem poised to lower rates further this year.

Negative interest rates have become commonplace in Europe and Japan. Central banks in Denmark, Switzerland, Sweden, Japan, and the European Central Bank have slashed rates below zero to shore up weak economies or strengthen their currencies. The notion is that weakening a country’s currency makes it a less attractive investment than other currencies, giving the country’s exports a competitive advantage. Worldwide, there is more than $17 trillion in debt with negative yields, almost half of it in euros. The majority of the balance is in Japanese yen. Almost all of it is sovereign debt.

Central banks usually pay commercial banks interest on the reserves they keep at the central bank. Under a negative rate policy, the commercial institutions are required to pay interest on any surplus cash beyond what regulators say banks must keep on hand. This penalty is designed to incentivize commercial banks to lend more money. The view is that low or negative interest rates encourage businesses to invest and consumers to spend rather than pay a fee to keep their money safe. Loans put money into circulation and generate economic activity.

Lower or negative interest rates present both costs and benefits for consumers.

Imagine if you go to the bank for a loan and are told the bank will pay you for taking it. Who in their right mind rejects such an offer? Conversely, if you make a deposit, under a negative interest rate scenario you are actually paying the bank to hold your money.

A big concern, which has yet to be explained, is the impact of negative interest rates on money market funds, which are a foundational investment for many households. Negative interest rates reward borrowers at the expense of lenders or savers. The goal is to bring future consumption into the present.

One potential danger of this approach is the liquidity trap that occurs when interest rates are so low that they reduce the flow of money to the Main Street economy. Instead, it goes into investments that don’t generate economic activity, such as the stock market, as people desperately chase higher yields and push up stock prices.

Interest rate cuts tend to stimulate the stock market by making real returns on bonds less competitive. The President seems to think that makes for good economic policy. Negative interest rates might actually lead to lower interest costs on government debt. Debt service is one of the fastest growing drivers of federal spending.

Low interest rates are old hat. Even during the Obama administration, when the economy rarely topped 2 percent annual growth, business did not pick up when money was cheap. For the last decade, the low interest rate scenario has been a secret tax on savers, who are not generally speculators in the stock market.

Millions of Americans are either behind in the race to save for retirement or living off their interest income. They may spend less in a negative interest rate environment, which would reduce economic activity.

How using this unconventional monetary policy will work in the United States is a mystery. It could leave the Fed without any ammunition when an actual recession hits and could increase the likelihood that the President is reelected. One can only hope that Powell and company make the right economic call.

A recent announcement by nearly 200 CEOs that corporations should serve more than the bottom line may be great public relations, but don’t hold your breath waiting for big changes in the way corporate America operates.

For four decades the popular conception is that a corporation exists to maximize returns to shareholders. This conceit is the work of economists. Milton Friedman, who was awarded the Nobel Prize in Economics in 1976, made the case in a famous 1970 New York Times Magazine article that the social responsibility of business is to increase profits. It laid the intellectual foundations for the shareholder value revolution of the 1980s.

As he put it “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits.” His former students popularized the idea that the great challenge of corporate governance is getting executives (agents) to act in the interest of the shareholders (principals).

This view caught on and became conventional wisdom, as universally accepted as the idea that the sun revolves around the earth once was. Over time the U.S. stock market has focused strongly on corporations’ quarterly earnings to the point that a penny up or down from expected earnings per share can cause the stock price to fluctuate.

This has created a number of potential problems. For starters the short-term focus of the stock market dictates a short-term approach by management, at the expense of long-term shareholder value. For example, management might decide to shower cash on shareholders and not invest in research and development on projects that would only pay off down the road. Also, market pressures could tempt managers to cheat or manage earnings to meet investor expectations, especially since the compensation of CEOs and other executives is linked to stock performance.

This August, nearly 200 chief executives of major American corporations including Apple, Amazon, General Motors, and Walmart – all members of the powerful U.S. Business Roundtable – announced that corporations should no longer just maximize profits for shareholders but also benefit other stakeholders including employees, customers, and citizens.

Is this all just rosy rhetoric or a real change in mission? Will these corporations who are people, really nice people, now use house money to support expansive social goals that are irrelevant to maximizing shareholder returns? This rhetoric about the purpose of a corporation won’t even rise to the level of the inconsequential unless executives address basic questions.

Will they argue for changes in how they are paid, how corporations are taxed and regulated and focus instead on the long-term health of their companies? What metrics will these executives use to measure stakeholder returns? How will corporations pivot away from the needs of activist short-term investors? How will they balance the needs of multiple stakeholders to create value for all these shared interests? How will executives resolve stakeholder conflicts? What tradeoffs have to be made? There are more unasked and unanswered questions than positions in the Kama Sutra.

New York Times Columnist Farhad Manjoo believes the new mission statement is all foam and no beer. He cynically says these CEOs want you to know how much they care, but they will continue to eat your lunch while virtue signaling. Many others are quite skeptical that corporations will change the way they behave.

Former General Electric CEO Jack Welch said in a 2009 interview with the Financial Times that: “On the face of it, shareholder value is the dumbest idea in the world.” This comment may be the height of irony given that when he ran GE, the firm consistently met or beat analysts’ quarterly earnings forecasts.

One thing is for certain. The time is long overdue to shift the focus of corporations away from maximizing shareholder value and stock-based executive compensation. But don’t hold your breath. This is like asking business executives to perform surgery on themselves.

The weekend of Sept. 13 and 14, 2008 was one of the worst ever on Wall Street. And when Lehman Brothers went bankrupt on Sept. 15, it triggered a global financial panic.

Also over that weekend, Bank of America and Merrill Lynch hammered out one of the biggest deals in Wall Street history in less than 36 hours. The feds pushed for a deal to prevent Merrill from becoming the next domino to fall. With Lehman preparing to file for bankruptcy after failing to find a buyer, executives at both Bank of America and Merrill knew they needed to act quickly as Merrill’s liquidity was evaporating.

Merrill Lynch was founded in 1914 by Charles Merrill and his friend Edmund Lynch. During the next 30 years, it grew by a series of mergers and acquisitions into the nation’s largest and best-known retail brokerage firm. Just as Lehman Brothers had epitomized the “aristocratic German-Jewish culture” in the financial industry, Merrill Lynch became a symbol of “working-class Irish Catholic culture” (like New York City’s police and fire departments). Not that it mattered much when push came to shove in September 2008.

In 1971, Merrill Lynch became a publicly traded corporation. And in 1978, it acquired the small but prestigious investment bank White Weld & Company to expand its underwriting activities and take advantage of the ability of its huge retail brokerage arm to place new common stock issues with investors directly rather than through syndicates composed of other firms.

But by 2000, Merrill (like Lehman and Bear Stearns) was becoming increasingly dependent on its collaterized mortgage obligations business to grow profits. By goosing this growth by more than doubling its 2003 leverage ratio of 19-1 to 39 to 1 in 2007, Merrill was able to provide its common stock holders with a 13 percent increase in investment returns during this period.

By 2006, Merrill had leaped to the top spot in the nation’s collateriized mortgage obligations business, underwriting $35 billion in these securities, 40 percent of which were backed by sub-prime mortgages. To help secure its position, Merrill spent $1.3 billion to acquire First Franklin, one of the nation’s largest originators of sub-prime residential mortgages. This gave it a major in-house mortgage originator and reduced its dependence on buying mortgages from numerous banks and home loan firms to back new underwritings of collateralized mortgage obligations.

Concerns about Merrill’s viability increased during the summer of 2007, when two Bear Stearns hedge funds defaulted. As a short-term lender to these funds, Merrill seized $800 million of Bear’s mortgage assets and proceeded to auction them off in the secondary markets. But the auctions failed to generate reasonable bids for the sub-prime mortgages and highlighted Merrill’s exposure to these “toxic waste securities”. For the last quarter of 2007 and the first three quarters of 2008 combined, Merrill wrote down more than $46 billion to bad bets on real estate and other mortgage-related instruments.

These write downs had severe consequences for Merrill: the firm’s stock price fell significantly, Moody’s Investors Service placed Merrill’s long-term debt “on review for a possible downgrade”, traders in other firms lost confidence in the firm’s ability to meet its trading obligations, and the firm had to increase its equity capital by selling off assets such as its 20 percent stake in Bloomberg for a much-needed $4.4 billion.

Additionally, between May 2007 and September 2008, Merrill laid off over 7 percent of its employees. Its board ousted CEO Stan O’Neil in October 2007, though he retained $30 million in retirement benefits and $129 million in stocks and options.

Merrill’s continued write downs of toxic mortgage assets, increasing operating losses, difficulty refinancing its short-term borrowings made it clear that its days as an independent firm were numbered. On Sept. 14, 2008 Merrill agreed to sell itself to the Bank of America.

Financial markets are prone to instability. But when paired with excessive financial leverage, the result can be severe economic pain.

Next month is the 11th anniversary of the fall of the famed investment banking firm Lehman Brothers (“Lehman”), which froze up the nation’s credit system when it collapsed on Sept. 15.

The firm was founded as a dry goods business in 1850 in Alabama by brothers Henry, Emmanuel, and Mayer. Lehman began focusing on cotton trading and moved to New York during the late 1850s. That office eventually became its headquarters.

By 1900, Lehman had begun moving into underwriting new issues of common stocks for corporate clients, as well bond trading and financial advisory services. During the ensuing decades, it underwrote issues for corporations like Sears Roebuck, RCA, and Macy’s. In 1984, Lehman was acquired by American Express and merged with Shearson, the company’s brokerage subsidiary. This lasted until 1994, when American Express decided to get out of the brokerage business and spun off Lehman.

The company saw considerable success in the years that followed, as it increased its net revenues more than six-fold, to $19.2 billion. By the end of 2007, it was the fourth largest investment bank in the United States and seemed poised to continue its stellar growth.

But Lehman had become increasingly reliant on the subprime and commercial real estate markets. This went hand-in-hand with a 46 percent increase in its leverage ratio, from 24 to 1 in 2003 to 35 to 1 in 2007. Much of this leverage took the form of short-term debt with maturities as short as a single day. So Lehman had to continuously sweet talk its lenders about the “solid value” of the assets it had pledged as collateral for these “here-today-gone-tomorrow” loans.

The sweet talk was undercut by continued erosion of the housing and mortgage markets during the summer of 2007. Lehman’s common stock price fell 37 percent from June to August, as the firm closed its sub-prime mortgage arm, wrote off $3.5 billion in mortgage related assets, and laid off more than 6,000 employees by year’s end.

Things got even worse in 2008. In January, Lehman closed its wholesale mortgage lending unit and laid off another 1,300 employees in a vain attempt to stem further hemorrhaging from its sub-prime mortgage operations. Then Standard & Poor’s credit rating agency downgraded its outlook on Lehman from “Stable” to “Negative” on the expectation that its revenue would decline by at least another 20 percent, which caused Lehman’s stock price to plunge an additional 48 percent.

Lehman attempted to counter by selling $4 billion in convertible preferred stock, but the fresh cash was quickly soaked up by more write-offs. Rumors flew that other firms were refusing to trade with Lehman.

The company contemplated “taking itself private,” but financing wasn’t available. Lehman’s next move was to try and locate buyers for $30 billion of its commercial mortgages, whose actual market value couldn’t be determined because their trading activity was virtually non-existent. Talks with the Korea Development Bank, China’s CITIC Securities, and the Royal Bank of Canada went nowhere.

The time had come for the federal government to step in if Lehman was to be saved. But public backlash against the earlier Bear Stearns bailout made such a rescue politically untenable. With voices from all sides of the political spectrum screaming at the feds for using taxpayer funds to bail out big Wall Street firms that had caused this mess, while refusing to lift a finger to help American families in danger of losing their homes.

On Sept. 15, 2008, Lehman had to file for Chapter 11 bankruptcy, leaving its viable businesses to be snapped up at fire-sale prices by sharp-eyed bottom fishers.

At the time it was the largest Chapter 11 bankruptcy in American history. In retrospect, it’s generally regarded as the most disastrous decision by the feds since the early 1930s, when the Federal Reserve chose to shrink the nation’s money supply by one-third, which shattered the American economy for the rest of the decade.