How Top Financial Managers Dig Their Private Finance into a Hole

Disclaimer: The views and opinions expressed in this post are mine and do not necessarily reflect the views or positions of my employer.

A fundamental principle in personal investment is diversification. Therefore, investing a significant portion of your savings in your employer's stock is unwise. If the company fails, you risk losing both your income and your savings. More dangerously, some employees take out loans to purchase additional stock, which can leave them jobless, asset-less, and in debt if the company struggles. Despite these clear risks, managers at renowned financial institutions that later faced crises have made these exact choices.

Take the example of FTX, which experienced a rapid ascent and a dramatic downfall. As only few employees were convicted, many of them could in theory have built substantial wealth through their high salaries. However, as Michael Lewis details in "Going Infinite", the majority lost everything by heavily investing in FTX's proprietary tokens. Fortunately, they avoided significant external debt—possibly because potential lenders considered them too high-risk.

One might argue that the FTX team, largely naive crypto enthusiasts, lacked seasoned financial expertise. Yet, a similar situation unfolded at Bridgewater, one of the world's most prestigious hedge funds. Here, top managers entrusted by leading global institutions and affluent individuals borrowed heavily to buy the firm's illiquid stock from founder Ray Dalio for their private portfolios. Although Bridgewater did not fail, internal conflicts led to some indebted managers being dismissed or having their pay reduced. This episode is vividly recounted in Rob Copeland’s book, “The Fund.”

A dramatic episode also took place at the Swedish bank HQ, which offered its employees an exclusive chance to invest in its convertible bonds, promising either the full upside of HQ's stock or a fixed, high interest rate if the stock underperformed. They would have faced losses only in case of bankruptcy. The bank's private banking division, which advised wealthy clients on prudent investments, saw many of its advisors pile into these bonds, funded by loans from other banks. When HQ faced severe financial difficulties in 2011 and neared the previously disregarded bankruptcy, these employees found themselves on the edge. This story is thoroughly chronicled in "Stora bankh?rvan" and "HQ Gate."

The cases of FTX, Bridgewater, and HQ Bank highlight the stark contrast between the risk-taking mentality of employees and the more cautious approach of entrepreneurs. While employees often succumb to overconfidence and invest deeply in company-issued securities, founders like Ray Dalio and HQ’s Mats Qviberg maintained more diversified investment strategies. For instance, while Bridgewater's staff was buying, Dalio was systematically selling off his shares. Qviberg, when asked to provide additional capital to bail out employees, chose to move on and avoid further entangling his personal finances with the bank’s troubles. Even the seemingly naive Sam Bankman-Fried had built a diversified equity and crypto portfolio (although it later became subject to clawbacks due to criminal charges against him). This underscores that maintaining a diversified portfolio is not merely advisable but essential for safeguarding personal finances against instability. Indeed, at some points, founders also went all-in on their ventures, but they wisely began to secure their gains as soon as circumstances permitted.