Procerity

The “Volcker Rule” is an attempt to rein in moral hazard. Moral hazard exists because the executives of financial corporations reap the rewards of taking risks that resolve in their favor, but taxpayers pay the price of risks gone awry. A recent Reuters article on Warren Buffet’s refusal to rescue Lehman Brothers before its collapse is illustrative. Buffet would apparently only invest in the firm if Lehman executives would also invest on the same terms. Apparently, that was not going to happen and Buffet seems to have taken that as a lack of confidence. Had Lehman Brothers been worthy of investment, its executives would certainly have put their own money on the line. But with the ship in danger of sinking, insiders were looking to pass the risk onto someone else. Fortunately for Berkshire Hathaway shareholders, involvement in Lehman Brothers was avoided. Unfortunately, for those of us financing the subsequent bailouts and suffering through the recession, moral hazard was not avoided.