moral hazard

Simon Johnson, Kwak on Moral Hazard

Remember the entire concept of moral hazard in bailing out private institutions who done it to themselves? Remember how that backfired on Lehman Brothers?

In Lehman Brothers and the Persistence of Moral Hazard, Simon Johnson and James Kwak point out moral hazard was already built into the system through these three main points:

  • bank employees and managers had asymmetric compensation structures
  • Second, shareholders had the same payoff structure
  • creditors had only limited incentives to watch over major banks

Then, they continue with proposals for financial reforms:

If the Obama administration is serious about preventing a future financial crisis, it will have to address these three forms of moral hazard. However, its proposals may not be adequate to the task.

$275 Billion on Foreclosures

The Obama administration today released a plan to stem foreclosures.


U.S. President Barack Obama pledged $275 billion to a program that includes cutting mortgage payments for as many as 9 million struggling homeowners and expanding the role of Fannie Mae and Freddie Mac in curbing foreclosures.

The plan will help as many as 5 million homeowners refinance loans owned or guaranteed by Fannie and Freddie, the president said. Treasury will buy as much as $200 billion of preferred stock in the two mortgage companies, twice as much as previously promised, he said.

CBS Market Watch: