Tuesday, September 16, 2008

Moral Hazard for Corporations

With all the talk about “moral hazard” lately, I have realized something: there is a basic flaw in the way the subject is typically discussed with respect to financial corporations. I’m not saying that the people discussing it are necessarily misunderstanding, but the terms in which it’s typically discussed will tend to lead the unwary into sloppy thinking or confusion.

Take, for example, the aphorism (regarding deposit insurance), “Heads stockholders win, tails taxpayers lose.” (This aphorism was recently used by, and may have been coined by, Paul Krugman. To be fair, if you read his whole entry, the language is more precise when he discusses the matter explicitly. But he also uses the misleading expression – which he did not coin – “FDIC put.”) This makes it sound as if deposit insurance were somehow protecting stockholders from the consequences of risky actions taken on their behalf. But what if there were no deposit insurance and the same risky actions were taken? What would happen to stockholders if those risks turned out badly? The stockholders would lose what they put into the corporation but no more – exactly the same as when there is deposit insurance. The moral hazard problem exists in general with stockholders, whether or not the assets are insured, because of the limited liability inherent in the corporate form of ownership. There is no “FDIC put” for stockholders; there is merely the “corporate put” that exists for all corporations.

When we talk about corporations whose assets are insured, either explicitly or implicitly, the special moral hazard problem is not with stockholders but with creditors. In the case of commercial banks, the creditors are known as depositors. The problem with deposit insurance is that it takes away the incentive that depositors would have to select and police their banks in such a way as to prevent excessive risk-taking. Overall, in the case of commercial banks, removing this incentive is a good thing, because depositors – with limited information and resources – aren’t able to do a very good job of policing and selecting banks. Their attempts to identify “bad banks” often result in “false positives” that precipitate bank runs. It makes much more sense to have regulators – who have more resources and better information – do the policing.

So I’ll repeat the point I’ve made several times before. When we talk about the implicit insurance that is (apparently not, as of yesterday) offered to investment banks and the like, the issue is not whether the stockholders are being protected – they’re always protected by the rules of corporate ownership – but whether the creditors are being protected. Are creditors being encouraged to make rash decisions about where to lend their money? Is the process of avoiding those rash decisions (as in the case of commercial banks) an inefficient one that could be done better by someone else (regulators, presumably)?

I have argued that, in the case of major investment banks, the moral hazard for creditors should not be a major concern. The comments have convinced me that I may have overstated my case, but I stand behind the policy recommendation. (Well, a “recommendation” after the fact is known as a “criticism,” but I would have recommended the same thing before the fact. The main reason I didn’t talk about it before the fact is that I expected officials to do what I would have recommended anyhow.) Large investment banks can, and perhaps should, be allowed to fail sometimes, but not when the country is already in the midst of an ongoing financial crisis and interest rates are low enough to limit the potential for using monetary policy to blunt the economic effects. Creditors should perhaps take the risk of losing their investment during generally good times, when the effect on the economy would not be potentially disastrous. I’ll reserve judgment as to whether creditors should be (implicitly or explicitly) insured (and I will certainly agree that such insurance should come with additional regulation), but I will not retract my opinion that the financial system as a whole should be insured. Sometimes implementing insurance for the system as a whole requires that individual institutions be bailed out.

Labels: , ,


Anonymous Jim Glass said...

"But what if there were no deposit insurance and the same risky actions were taken?"

I am running the Casino Savings & Loan. In a world of 3% interest rates on deposits I offer 7%.

Prospective depositors reply: "Who are you kidding? I don't need the smarts of a Lehman investment banker to know you are taking some sort of crazy risk with my money to pay 7%! "

I tell them: "Your deposits are 100% guaranteed by the federal govt! Under that new law, you know. So what's the risk I'm taking to you?"

They say: "Well, if you put it that way, OK, sure. Here's our $X million, and give us that 7%!"

So I take the money, and as a top-owner exec of CS&L provide myself a merit-based compensation package that pays me the big bucks, based on the huge deposits I'm drawing in and the high investement returns produced by my proudly "aggressive and innovative" investment strategy. And as the share price of my now "growth stock" S&L shoots way up, I cash some of my shares out and deposit others in my secure-forever Keogh and 401(k) retirement plans, where I swap them tax-free for S&P 500 index shares.

(Very possibly I sell out on top right there, having made a name for myself as a "star banker" forever. Thereafter you watch me on Charlie Rose opining about periodic banking crises. )

A few years later market conditions turn, my innovative investment strategy blows up (my card counters get kicked out of the casino), and CS&L goes bust.

If I'm still running it I'm a bit chagrined but walk away still plenty rich enough on the money I've put away, and immune from liability on my common shares (those I still own) -- having done not a thing that was illegal. And the FDIC gets stuck with $X of deposit liabilities it has to pay off. All because of the risky investments I could never have made but for the deposit insurance that drew the extra $X of deposits to me.

A true story writ many times over during the great S&L boom and bust.

Create a free lunch opportunity for borrowers and you create a free lunch opportunity that lenders and their equity owner can game for profit too -- through taking riskier actions -- every time.

That's why these things have to be done with care, and with the tradeoffs full in mind.

Sat Sep 20, 06:24:00 PM EDT  
Blogger knzn said...

You're saying that "the same risky actions" could not have been taken in the first place if there were no deposit insurance, and that is of course true. But a counterfactual hypothesis ("if...the same risky actions were taken") does not have to be one that represents an actual possibility. Deposit insurance allows those actions to be taken, not by the way it affects stockholders or managers directly, but by the way it affects depositors and the consequent way in which depositors' behavior affects stockholders or managers. The insurance is not creating a moral hazard for stockholders; it is creating a moral hazard for depositors, and the stockholders' and managers' actions are being affected by the consequent behavior of the depositors.

Certainly the equity owners and managers can game the system, but only because their depositors have no incentive to police them or to exercise prudence in their selection. There is no moral hazard problem with respect to the owners and managers, except the ones that always exist with corporations. The problem is not that the owners and managers have a special moral hazard created by deposit insurance but that they lack oversight to prevent them from taking advantage of the moral hazard that they already had.

Sun Sep 21, 02:53:00 AM EDT  
Blogger sexy11 said...







Wed Jan 14, 06:40:00 AM EST  
Blogger sex999 said...



Wed Jan 14, 10:15:00 PM EST  
Anonymous Anonymous said...

看房子,買房子,建商自售,自售,台北新成屋,台北豪宅,新成屋,豪宅,美髮儀器,美髮,儀器,髮型,EMBA,MBA,學位,EMBA,專業認證,認證課程,博士學位,DBA,PHD,在職進修,碩士學位,推廣教育,DBA,進修課程,碩士學位,網路廣告,關鍵字廣告,關鍵字,廣告,課程介紹,學分班,文憑,牛樟芝,段木,牛樟菇,日式料理, 台北居酒屋,燒肉,結婚,婚宴場地,推車飲茶,港式點心,尾牙春酒,台北住宿,國內訂房,台北HOTEL,台北婚宴,飯店優惠,台北結婚,婚宴場地,推車飲茶,港式點心,尾牙春酒,住宿,訂房,HOTEL,飯店,造型系列,學位,牛樟芝,腦磷脂,磷脂絲胺酸,SEO,婚宴,捷運,學區,美髮,儀器,髮型,牛樟芝,腦磷脂,磷脂絲胺酸,看房子,買房子,建商自售,自售,房子,捷運,學區,台北新成屋,台北豪宅,新成屋,豪宅,學位,碩士學位,進修,在職進修, 課程,教育,學位,證照,mba,文憑,學分班,網路廣告,關鍵字廣告,關鍵字,SEO,关键词,网络广告,关键词广告,SEO,关键词,网络广告,关键词广告,SEO,台北住宿,國內訂房,台北HOTEL,台北婚宴,飯店優惠,住宿,訂房,HOTEL,飯店,婚宴,台北住宿,國內訂房,台北HOTEL,台北婚宴,飯店優惠,住宿,訂房,HOTEL,飯店,婚宴,台北住宿,國內訂房,台北HOTEL,台北婚宴,飯店優惠,住宿,訂房,HOTEL,飯店,婚宴,結婚,婚宴場地,推車飲茶,港式點心,尾牙春酒,台北結婚,婚宴場地,推車飲茶,港式點心,尾牙春酒,結婚,婚宴場地,推車飲茶,港式點心,尾牙春酒,台北結婚,婚宴場地,推車飲茶,港式點心,尾牙春酒,結婚,婚宴場地,推車飲茶,港式點心,尾牙春酒,台北結婚,婚宴場地,推車飲茶,港式點心,尾牙春酒,居酒屋,燒烤,美髮,儀器,髮型,美髮,儀器,髮型,美髮,儀器,髮型,美髮,儀器,髮型,小套房,小套房,進修,在職進修,留學,證照,MBA,EMBA,留學,MBA,EMBA,留學,進修,在職進修,牛樟芝,段木,牛樟菇,住宿,民宿,飯宿,旅遊,住宿,民宿,飯宿,旅遊,住宿,民宿,飯宿,旅遊,住宿,民宿,飯宿,旅遊,住宿,民宿,飯宿,旅遊,住宿,民宿,飯宿,旅遊,住宿,民宿,飯宿,旅遊,美容,美髮,整形,造型,美容,美髮,整形,造型,美容,美髮,整形,造型,美容,美髮,整形,造型,美容,美髮,整形,造型,美容,美髮,整形,造型,美容,美髮,整形,造型,設計,室內設計,裝潢,房地產,設計,室內設計,裝潢,房地產,設計,室內設計,裝潢,房地產,設計,室內設計,裝潢,房地產,設計,室內設計,裝潢,房地產,設計,室內設計,裝潢,房地產,設計,室內設計,裝潢,房地產,設計,室內設計,裝潢,房地產,進修,在職進修,MBA,EMBA,進修,在職進修,MBA,EMBA,進修,在職進修,MBA,EMBA,進修,在職進修,MBA,EMBA,進修,在職進修,MBA,EMBA,進修,在職進修,MBA,EMBA,進修,在職進修,MBA,EMBA,住宿,民宿,飯店,旅遊,美容,美髮,整形,造型,設計,室內設計,裝潢,房地產,進修,在職進修,MBA,EMBA

Sun Mar 08, 11:25:00 AM EDT  
Blogger 风和日丽 said...

搬家搬家搬家公司搬家搬家 百家乐 轮盘 21点 德州扑克 百家乐系统 真人娱乐场 百家乐 足球 德州扑克 电子游戏 英格兰超级联赛 德国甲组联赛 意大利甲组联赛 西班牙甲组联赛 法国甲组联赛欧冠杯 英超 足球比分 足球彩票 体育彩票 即时比分 免費a片 a片 免費av 色情影片 情色 情色網 色情網站 色情 成人網 成人圖片 成人影片 18成人 av av女優 av av女優 情慾 走光 做愛 sex H漫 情色 情趣用品 情色 a片 a片 成人網站 成人影片 情趣用品 情趣用品 アダルト アダルト アダルトサイト アダルトサイト 情趣用品徵信社徵信徵信徵信社外遇徵信徵信社外遇

Mon Mar 09, 11:39:00 PM EDT  
Blogger Happy New Year 2009! said...









Wed Mar 11, 04:41:00 AM EDT  
Anonymous Anonymous said...


Wed Apr 01, 09:30:00 AM EDT  
Anonymous Anonymous said...

酒店喝酒,禮服店,酒店小姐,酒店領檯,便服店,鋼琴酒吧,酒店兼職,酒店兼差,酒店打工,伴唱小姐,暑假打工,酒店上班,酒店兼職,ktv酒店,酒店,酒店公關,酒店兼差,酒店上班,酒店打工,禮服酒店,禮服店,酒店小姐,酒店兼差,暑假打工,酒店經紀,台北酒店,禮服店 ,酒店小姐,酒店經紀,酒店兼差,寒假打工,酒店小姐,台北酒店,禮服店 ,酒店小姐,酒店經紀,酒店兼差,暑假打工,酒店小姐,台北酒店,禮服店 ,酒店小姐,酒店經紀,酒店兼差,寒假打工,台北酒店,禮服店 ,酒店小姐,酒店經紀,酒店兼差,暑假打工,酒店小姐,台北酒店,禮服店 ,酒店小姐,酒店兼差,暑假打工,酒店小姐,台北酒店,禮服店 ,酒店小姐,酒店經紀,酒店兼差,寒假打工,酒店小姐,台北酒店,禮服店 ,酒店小姐,酒店經紀,酒店兼差,暑假打工,酒店小姐,台北酒店,禮服店 ,酒店小姐,酒店經紀,酒店兼差,寒假打工,酒店小姐,台北酒店,禮服店 ,酒店小姐,酒店經紀,酒店兼差,暑假打工,酒店小姐,禮服店 ,酒店小姐,酒店經紀,酒店兼差,寒假打工,酒店小姐,禮服店 ,酒店小姐,酒店經紀,酒店兼差,暑假打工,酒店小姐,禮服店 ,酒店小姐,酒店經紀,酒店兼差,寒假打工,酒店小姐,禮服店 ,酒店小姐,酒店經紀,酒店兼差,暑假打工,酒店小姐,酒店傳播,酒店經紀人,酒店,酒店,酒店,酒店 ,禮服店 , 酒店小姐,酒店經紀,酒店兼差,暑假打工,招待所,酒店小姐,酒店兼差,寒假打工,酒店上班,暑假打工,酒店公關,酒店兼職,禮服店 , 酒店小姐 ,酒店經紀 ,酒店兼差,暑假打工,酒店,酒店,酒店經紀,酒店領檯 ,禮服店 ,酒店小姐 ,酒店經紀 ,酒店兼差,暑假打工, 酒店上班,禮服店 ,酒店小姐 ,酒店經紀 ,酒店兼差,暑假打工, 酒店上班,禮服店 ,酒店小姐 ,酒店經紀 ,酒店兼差,暑假打工, 酒店上班,酒店經紀

Mon Apr 20, 10:23:00 PM EDT  
Anonymous Anonymous said...

There are ed hardy shirts
,pretty ed hardy shirt for men,

ed hardy womens in the ed hardy online store

designed by ed hardy ,
many cheap ed hardy shirt ,glasses,caps,trouers ed hardy shirts on sale ,

You can go to edhardyshirts.com to have a look ,you may find one of ed hardy clothing fit for you
Top qualitymen's jacket,
These cheap jacket are on sale now,you can find
north face jackets inmage on our web

Mon Jun 08, 01:52:00 AM EDT  
Anonymous Anonymous said...

Do you wannaghd hair straighteners for you own , we have many
cheap ghd hair straightenersin style and great,you can choose one from these
hair straighteners
Authentic chaussure puma
chaussure sport
And chaussure nike shoes
Come here to have a look of our Wholesale Jeans
Many fashionMens Jeans ,eye-catching
Womens Jeans ,and special out standing
Blue Jeans ,you can spend less money on our
Discount Jeans but gain really fine jeans, absolutely a great bargain.
China Wholesale
wholesale from china
buy products wholesale
China Wholesalers

Mon Jun 08, 01:55:00 AM EDT  
Blogger tank said...


Sat Jul 11, 06:51:00 AM EDT  
Anonymous Anonymous said...






Thu Jul 30, 11:22:00 PM EDT  
Blogger 酒店上班請找艾葳 said...

艾葳酒店經紀是合法的公司、我們是不會跟水水簽任何的合約 ( 請放心 ),我們是不會強押水水辛苦工作的薪水,我們絕對不會對任何人公開水水的資料、工作環境高雅時尚,無業績壓力,無脫秀無喝酒壓力,高層次會員制客源,工作輕鬆。

Mon Aug 03, 11:39:00 PM EDT  
Blogger tjutrfjutrjirt said...


Thu Aug 13, 07:03:00 AM EDT  
Blogger ming said...

I tell them: "Your deposits are 100% guaranteed by the federal govt!
Under that new law, you know. So what's the risk I'm taking to you?"

Mon Aug 24, 10:45:00 AM EDT  
Blogger ming said...

And as the share price of my now "growth stock" S&L shoots way up, I cash some of my shares out and
deposit others in my secure-forever Keogh and 401(k) retirement plans, where I swap them tax-free for S&P 500 index shares.

Mon Aug 24, 10:46:00 AM EDT  
Blogger ming said...

The insurance is not creating a moral hazard for stockholders; it is creating a moral hazard for
depositors, and the stockholders' and managers' actions are being affected by the consequent behavior of the depositors.

Mon Aug 24, 10:46:00 AM EDT  
Blogger ming said...

A true story writ many times over
during the great S&L boom and bust.

Mon Aug 24, 10:47:00 AM EDT  
Blogger beautyli said...

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I like it

Tue Aug 25, 08:31:00 PM EDT  
Blogger beautyli said...

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . good,very good!

Tue Aug 25, 08:31:00 PM EDT  
Blogger beautyli said...

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . .

This article is very good,I like it !

Tue Aug 25, 08:32:00 PM EDT  
Blogger beautyli said...

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . good!good!

Tue Aug 25, 08:33:00 PM EDT  
Blogger yi said...

Failure to agree with them is 'heresy'. Failure to behave properly is a 'sin'.
have lost or abandoned religion in the traditional sense by now, or have retained only a tenuous, formulaic connection, or have veered off into various unsatisfying concoctions of "spirituality"....................................

Sat Sep 19, 03:24:00 AM EDT  
Blogger poston said...

wholesale gemstone jewelry
wholesale crystal jewelry
crystal wholesale
rock crystal

crystal jewelry
wholesale jewelry
jewelry wholesale
cheap jewelry

Sun Sep 27, 10:55:00 PM EDT  
Blogger anran said...

Your blog is wonderful, I like it very much, thank you!
By the way, do you like polo shirts, which are very chic, especially the polo t shirts, I love them very much. I also like playing tennis rackets, it can keep healthy, what do you like to do?
We are the outlet of polo t shirts women, polo t shirts on sale, polo t shirts for women, polo shirts on sale, these products are best-seller in our store online.besides we also sell polo shirts men, men's polo shirt, men polo shirt, mens polo shirts, mens polo shirt and cheap polo shirts, discount polo shirts, men's polo shirts, women's polo shirts We are also the outlet of cheap tennis racket, discount tennis racket and the main product is prince tennis racquet, head tennis rackets, wilson tennis racket, babolat tennis racquet. So if you love sports, you should not miss our store, we can meet what you want, and you can find many surprise in our store

Wed Jan 20, 08:00:00 AM EST  
Anonymous Anonymous said...

借錢借貸網 借貸與借錢資訊網
借貸資訊 5880借貸救急網
票貼與借貸優質網 支票貼現
二胎,貼現,週轉優質網 貼現融資救急網

Tue Jan 26, 12:34:00 PM EST  
Blogger 心情部落格 said...


Wed Feb 03, 03:11:00 AM EST  
Anonymous cheap electronics said...

I am running the Casino Savings & Loan. In a world of 3% interest rates on deposits I offer 7%.

Prospective depositors reply: "Who are you kidding? I don't need the smarts of a Lehman investment banker to know you are taking some sort of crazy risk with my money to pay 7%! "

I tell them: "Your deposits are 1

Mon Feb 14, 03:53:00 AM EST  
Anonymous prom dresses 2011 said...

way I'll be subscribing to your feed and I hope you post again soon.

Thu Feb 24, 02:23:00 AM EST  
Blogger 魅惑 said...



Thu Apr 14, 01:41:00 AM EDT  
Blogger 魅惑 said...


Thu Apr 14, 01:42:00 AM EDT  
Blogger game vera said...

Buy high quality nds card, nintendo ds card online, www.ndstrade.com provide best r4 revolution, nintendo ds r4 for DS Lite with the lowest purchase high quality r4 ds, r4 card, r4 sdhc, r4i sdhc, r4i gold, Nintendo DS R4, n5. Enjoy the cheapest cards for R4 Adapter.
Discount ds m3 card, m3i zero, m3 real, m3 ds real for DS Lite at ndstrade.com,enjoy m3 card with high quality and low price.
Cheap ez flash card - Get quality ez flash vi Card, ez flash 3 in 1, Ez Flash DS at hottest prices.
Discount acekard 2i, Purchase acekard Card for acekard 2i online to save more.
Buy DSTT Card online, Choose from Cheap supercard, Enjoy wonderful cyclods game with quality micro sd from r4dsnds.com.
Buy PS3 Jailbreak, PS3 key online, Choose from Cheap PS3 Controller and PS3 move. Enjoy wonderful Ps3 games with quality PsBreak.

Fri Jun 03, 11:05:00 PM EDT  
Anonymous Your Escort Agency said...

Your Escort Agency offers exclusive and most beautiful London escort girls of various nationalities.

Sun Jun 26, 06:16:00 AM EDT  
Anonymous London escort agency said...

Your Mademoiselle escorts agency is select the most charming, friendly and the finest London escorts for our Escort gallery and provide the best escort services in London.

Sun Jun 26, 11:42:00 AM EDT  
Anonymous Olive Green Ball Gown said...

At the end of the day we have an image which is 35 years old, with an interesting and sordid history. Albums with the controversial image are still available *world wide* in recent pressings. You can walk into a record store in the UK and buy it. The image is widely available on the internet, including sites like amazon.co.uk. So blocking the Wikipedia article discussing the image simply makes no sense. (they didn't even block the image itself!)

Sun Jun 26, 09:39:00 PM EDT  
Anonymous London escorts said...

If you are looking for European escorts Bestescort4U is the best place in London

Thu Aug 04, 01:12:00 PM EDT  
Anonymous Escorts London said...

London escort agency which provides genuine female escort models in Central London area

Thu Aug 04, 05:31:00 PM EDT  
Anonymous Elite escorts said...

Beautiful escorts can be found at Elite Club International. Elite Club International is an elite escort agency operating mostly in Dubai and London.

Sun Aug 07, 02:32:00 PM EDT  
Anonymous Porn Star Escorts said...

Bunny Planet is an Exclusive Online Gentlemen's Club filled with Adult Stars, Adult Entertainers, Centerfolds and Erotic Models who want to meet you in person now!

Mon Aug 08, 09:48:00 AM EDT  
Anonymous Japanese London Escorts said...

We are a Central London agency with many of girls exclusive to London Japanese Paradise.

Fri Sep 02, 03:53:00 AM EDT  
Anonymous Escort Models said...

Adoras Models is an escort agency in London where you can find the beautiful and exclusive London escorts. Adoras Models prides itself in running a honest and efficient London escort agency.

Sat Sep 03, 08:22:00 AM EDT  
Anonymous London Asian Escorts said...

London Asian Escorts is an Asian and Oriental escort agency operating in Central London. The agency provides escort service for a true gentlemen.

Fri Sep 09, 11:18:00 AM EDT  
Anonymous Escorts of London said...

Escort of London agency a well-established and respected agency. We have a great selection of girls in London for your pleasure.

Tue Oct 11, 10:43:00 AM EDT  
Anonymous London Escorts said...

Only Pleasures is a well established and respected London escort agency. We are pride of ourselves on having the most exquisite selection of escort girls in London for your pleasure…

Mon Oct 17, 04:17:00 AM EDT  
Anonymous Anonymous said...


Fri Oct 21, 02:23:00 AM EDT  
Anonymous Anonymous said...


Sat Oct 22, 12:45:00 PM EDT  

Post a Comment

Links to this post:

Create a Link

<< Home