Legal Commentary

That pesky trust-based business model

By Tom Kirkendall

Over the weekend, we learned that the Fed had bailed out New York-based investment bank Bear Stearns during this unsettled time in the financial markets.

Almost seven years ago, a much larger company that shared many characteristics with Bear Stearns -- Houston-based Enron -- did not even generate serious consideration for a Fed bailout before it went under in the turbulent post-9/11 financial markets.

In between those two events, one of the world's wealthiest insurers and another company that is similar in many respects to Bear Stearns and Enron --  American Insurance Group -- barely escaped a similar fate by cutting a deal with the now-disgraced former Governor and Attorney General of New York to cut loose the executive primarily responsible for creating AIG's vast wealth.

The fact of the matter is that Enron was -- and Bear Stearns and AIG are -- trust-based businesses that fundamentally depend on the trust of the markets to sustain their value. Once that trust is lost, such companies lose value quickly and dramatically. Although unfortunate for the owners of such companies, such a dramatic loss of wealth does not necessarily mean that any criminal conduct was involved in the loss. Rather, such loss is simply one of the risks of investing in a company based on a trust-based business model. The sooner we all recognize and understand this risk, the quicker we can put a stop to injustices such as this.

Full post as published by Houston's Clear Thinkers on March 16, 2008 (boomark / email).