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They Don’t Learn

This was printed in the New York Times: Ex-County Comptroller Fined in Florida

A judge has fined Escambia County’s former comptroller $1,600 but decided against a jail term for the former official, Joe Flowers, who entered a plea of no contest to charges that he mishandled taxpayer money, including a $15 million loss on derivatives.

Mr. Flowers pleaded no contest to four counts of malfeasance in office.

He was accused of purchasing the derivatives, entering into reverse repurchase agreements with brokerage firms to cover up the losses, banking money without open bidding and approving a lease-purchase deal with a computer company — all without authority.

Derivatives are securities whose values are based on, or derived from, an underlying factor — mortgages, in Mr. Flowers’s case. In a reverse repurchase agreement, a dealer buys a security from an investor who agrees to buy it back at a later date.

This article was published Friday, September 29, 1995. Notice that these were mortgage-based derivatives, the same toxic asset that caused the current meltdown. Joe Flowers had been the Comptroller for two decades, getting re-elected, generally without a challenger, because he was such a staunch fiscal conservative, just like the guy in Orange County, California that bankrupted them.

It has been a truism for my entire life, which goes back to the Truman administration, that anything with a higher than average return, has a higher than average risk. That has never changed. Anyone in the business who says they didn’t know, is lying. They might not have known the details, but based on the returns, they damn sure knew it was risky.