Moral hazard in the Bear market
Posted March 17, 2008on:
Megan McArdle worries a little about the moral hazard problem that JP Morgan and the Fed’s ‘rescue’ of Bear Stearns creates (although her major point is that we should be relieved that it was rescued from default). knzn’s take on the issue puts the problem in perspective:
[Hypothetical future investor]: I own a major stake in an investment bank, and I’m getting concerned about their risk management. Should I bring this up at the shareholders’ meeting?
[Hypothetical friend]: I don’t see why. What’s the worst that can happen? The bank will go sour, the Fed will arrange a bailout, and you’ll only lose 95 percent of the money you invested, 96 tops. What’s the big deal?