On Nov 30, 2007 6:55 AM, Jim Devine <[EMAIL PROTECTED]> wrote: > > The issue is not so much that financial players have insurance against > > loss. The issue is that they are not paying for the insurance. > > as with the Malibu example, they may not be paying _enough_ for the insurance.
Yes I agree. I oversimplified by saying MH-beneficiaries get insurance for free - but the same thing would apply if it is underpaid rather than free. > because of the poor rating system for mortgage-backed securities, NR > may not have known what it was doing. I don't believe this for a moment. I think Northern Rock, Citibank and all the others knew exactly what they were doing. Chuck Prince's famous quote about "dancing until the music stops" clearly shows this type of thinking. > but did they _expect_ to be bailed out? it's only when NR bases its > decisions of the presence of insurance that we see a MH problem. By disregarding the tail-risk they acted as if they had insurance. NR may or may not have expected a central bank bailout, but by completely ignoring the possibility of a credit crunch they acted in the same way that someone with insurance would act. So I think it is rightly classified as a Moral Hazard problem. -raghu.
