Friday, September 19, 2008

Bring back Moral Hazard

Since the big general bailout basically gives all banks and borrowers a free pass to be reckless, there should be some measure to assure that people worry. The government organ, whatever it is, should refuse to buy the crappy assets of roughly (randomized) every 5th bank, but should purchase from the unlucky banks' counterparties any toxic paper they have issued (or perhaps excluding every third counterparty to keep them on their toes). As long as the selection is random -- and administered by an external CPA -- banks will need to stay on their toes.

1 comment:

Steed said...

Here's how I'm guessing this will work. They will come up with a mathematical way of assigning value to structured financial products and they will make offers for it based on level of seniority, quality of borrowers, etc. I think this will save most of the players. But moral hazard has certainly been on the forefront of Paulson's thinking. That's why he wanted the $2 share price for Bear. his price was so low that the acquirer raised it voluntarily so as not to aggravate their new employees. I trust Paulson to punish the shareholders in all the financial institutions, save Goldman, Sachs. The minute the short-sellers got ahold of goldman, on thursday, he banned short-selling, and put a floor under all structured financial products, and effectively shoved a pole so far up their butts they scurried home to Scarsdale as soon as they could to apply ointment.