Theological Variations   /   Summer 2023   /    Notes & Comments

Immoral Hazard

Making the incentives count.

Jonathan D. Teubner

THR illustration/Shutterstock.

Since the collapse of Silicon Valley Bank (SVB) in early March, the term moral hazard has once again been on the lips of those men and women—otherwise amoral—passionately dedicated to the bottom line. In the days following the run on SVB, the Wall Street Journal, arguably the flagship publication of the amoralist, had its own hot take: If we bail out SVB now, it will only encourage other banks to engage in the same type of risky behavior in the future. We must avoid moral hazard, or the risks will harden into the new normal.

In the wake of the 2008 housing crash, the US government stepped in to bail out even those institutional players that were knowingly working both sides of the housing crash. Goldman Sachs is a memorable case in point. It promoted collateral debt obligations consisting of subprime mortgages to some clients while shorting the CDOs for themselves and a handful of privileged clients. The risk of not doing something was so great that even those inclined to let some of the investment “banks” take more of a hit were not inclined to let them fail just to avoid moral hazard. Goldman Sachs alone received a $10 billion investment from the US Treasury (which, it should be noted, the firm repaid in full the following year).

Perhaps because the collapse of a midsized bank (SVB had a little more than $200 billion in deposits at its peak) didn’t quite rise to the level of turmoil that would result if, say, Bank of America, JPMorgan Chase, or Citigroup suffered a similar fate, questions of systemic risk weren’t quite as real. (As it turned out, bank size wasn’t the only factor.). But how moral is moral hazard, really?

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