A Moral Hazard

Difficult as it is to fathom some companies are deliberately run into the ground for the self servicing interests of a insiders. A few prominent ones coming to mind are Country Wide and Enron. Poor Ken Lay still hold up in that CIA safe mansion must be missing his yacht real bad by now. Remember his stupidity defense? Yea well guess what? Enron did not write the Wall Street book of scams, they only took a page and now it seems Merrill Lynch and CEO John Thain are reading the same page. And you can bet that John too will prefer being called incompetent rather than GUILTY. The reality of course is that criminal intentions rather than stupidity are what is running the worlds largest corporations into oblivion.

And the cause of what looks like colossal stupidity is simple: bad incentives. Why be prudent when shareholders have no influence on your pay and the higher ups look only at calendar year results?

The financial crisis du jour is nothing new, just the same old scam from the same old worn out page of the same old play book.

Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.

Why do you think they call it a moral hazard in the first place?