When the Federal Government bailed out Citigroup in 2008, "it did more than reassure troubled markets -- it encouraged high-risk behavior by insulating risk-takers from the consequences of failure."
Report to Congress of Hon. Neil Barofsky, Special Inspector General for the Troubled Asset Relief Program ("TARP"), quoted by Gretchen Morgenson, "Fair Game/A Bank Crisis Whodunit, With Laughs and Tears" p. 1, col. 2 (New York Times Nat'l ed., "SundayBusiness" Section, Sunday, January 30, 2011).
Last Thursday, January 27, the Financial Crisis Inquiry Commission released its report on the causes of the financial crisis and how the crisis played out for key regulators, financial institutions, and Federal Taxpayers. Here is a page from the FCIC's website that will allow you to download all or part of the report.
Lots of recent loose talk about "moral hazard" may actually be hitting the mark, but perhaps not as the shooters intended. The players in the financial crisis took huge risks with other people's money, made great amounts of personal profits while doing that, and then walked away and left the Federal Taxpayers to pay for the consequences when it all came apart.
When Taxpayer-funded Insurance is in place for any financial risk, where is the incentive to follow morality? Why would a financial institution or a regulatory agency not burn down the financial building if the only consequence to them is a large payout?
At least one significant cause of the financial crisis, then, truly appears to be "moral hazard": The Insurance in this instance, in the form of Federal Taxpayer payments, should never have been issued without far more careful underwriting by regulation, in a nutshell.
In addition to Ms. Gretchen Morgenson's column linked above, here are more newspaper reporters and columnists commenting on the FCIC report's analysis, conclusions, and stunning dissents: Sewell Chan, "Crisis Panel's Report Parsed Far and Wide" p. B1, col. 5 (New York Times Nat'l ed., "Business Day" Section, Friday, January 28, 2011); Joe Nocera, "Inquiry is Missing Bottom Line" (New York Times Online on Friday, January 28, 2011 and in print on Saturday, January 29, 2011); Jim Puzzanghera, "Financial Crisis Panel Finds Many at Fault" (Los Angeles Times Online, Thursday, January 27, 2011).
Please Read The Disclaimer.
Comments