Ethics Whisperer

Monday, January 28, 2013

Never Trust Anyone Who Can't Compound Interest

One reasons I have  been able to stick with ethics so long is that you get to meet a lot of interesting people, often on your  own terms. As I wrote earlier, I have even bumped into a few billionaires. Here is the story of one of them. I was once hired by a friend of mine, who had made a tidy sum on land speculation, to help his team develop a vision. This is not normal work for me, but it is not abnormal work either. My friend's company focused on what is called "raw" land, which means land that is not in use (excepting for farming) and which is not served by utilities. In order to get the hang of the business, I shadowed my friend to various meetings. My friends talent was to assemble a bunch of raw land in which there was little interest, create a concept around that land, and then get investors to buy into the concept. He had done this with one really big (city sized) chunk that he wanted to sell to a big, publicly traded real estate development company. I accompanied my friend to his meeting with the CEO of the public company, then a billionaire by most accounts, at which the deal would probably happen. The CEO offered my client a princely price in cash for the land and double the princely price if my client would accept payment in the public company's AAA rated bonds. It seemed too good to be true. The only problem was that when the value of the bonds was computed, the public  company's CFO incorrectly compounded the interest. At first I was  certain I was wrong as I have to compound interest manually. I have never been able to find the right key on a calculator. A half an hour later, I was sure the CFO had made a mistake. My client asked me whether he should take the cash or the bonds. It was here that I formulated one of my basic ethical principles which is, "Don't do business with people who can't compound interest." I told him to take the cash and he did. It was a good thing since the public company, American Continental