All through the debacle on Wall Street, the issue of Moral Hazard has been lingering. Moral Hazard says that people with insurance may take greater risks than those without such insurance. In the current stock market, hedge fund and other investment bankers have been dealing with very high risk transactions and extremely high leverage – some would say with the “insurance” that Fed or other US government agencies will come in and bail them out if they fail. Its class ic game of chicken – when I own a little, you can let me fail; but if I own a big piece of the financial action and can bring down many other financial institutions, then Moral Hazard applies – you Feds can’t let me fail. See International Herald Tribune/ Reuters Business for a reading on this.
The companies have a long “bailout history” to back them up – twice in the Savings and Loans industry, Long Term Capital Management are just the main cases in the past 20 years. So in the 2 stabs at bailing out Bear Sterns, it is interesting to see that Wall Street is pitching the Feds action as “no bailout”. And indeed it is not for Bear Steans, but for JP Morgan and all the other banks its is a Fed guaranteed huge gain on the Bear assets and ditto for 20 other huge private banks that now have lower financing costs and the ability offload portions of bad debt – all in the interest of getting getting the financial system that they has hugely and hazardously over-leveraged itself , hidden in the stealth world of non-transparent private equity/hedge funds, and used derivative instruments that even the best of financiers are calling hard to value.
So now that high finance has invoked its Moral Hazard Government Bailout Insurance, its time for the Insurance Company and Taxpayers to raise the rates and contractual constraints on a Wall Street that has proven that it cannot control its gambling urge.
And being in a gambling mood I’ll bet a fifth of the best Jim Beam that Wall Street finesses itself out of any real practical crackdown and renews its Feds Moral Hazard Insurance for next to nothing because they have the billions of lobbying money to do it.