Sean King

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Knoxville, Tennessee, United States

Sunday, July 19, 2009

Moral Hazard Made Worse

Megan McArdle: [B]anks like JP Morgan and Goldman have gotten a great deal out of the government interventions. For starters, they were the first and biggest beneficiaries of having the financial markets not collapse. And now they enjoy an implicit guarantee that Uncle Sam will not let them fail because they are simply too important. That is a very valuable and profitable guarantee to have.

So, why not take more risks, right? After all, shareholders gain virtually all the upside if the risks pay off, and yet they get bailed out by taxpayers if they don't. But banks wouldn't be so brazen as to exploit this fact, would they?

Of course they would:

While other firms have curtailed risk and preserved cash to protect against further losses, Goldman has returned to what made it so profitable in the past — high-risk trading and investing in everything from mortgages to commodities and underwriting of stock and debt offers.

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