Moral Hazard

Allowing those investment banks that found themselves unable to meet their obligations to creditors not to fail creates a moral hazard problem that will haunt not only the financial services industry but all businesses in the US for a generation.

• We have signalled to outside directors that they need not exercise due diligence in oversight of the companies on whose boards they sit.


• We have signalled to managers agents that their risky behaviour has no downside and thus that there is not cost to risky behaviour in the future.


• And we have signalled to owners - shareholders - that they need pay no heed to the actions of those working on their behalf. Their investment is guaranteed.

Everyone - owners and managers alike - how has an incentive to take ever larger risks. If they win fine; if they loose, not a problem, someone will come to their aid. The problem is that those who are being asked to provide that aid is all of us, the US taxpayer. We have created an expectation, not just in the banking sector, but thought the business community that if you are large enough, no harm will be allowed to come to you, if you’re big enough. Small business owners may create half the wealth in this country but they are not equal recipients when it comes to a transfer of wealth from Main Street to Wall Street and beyond.