Moral Hazard

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  • Topic: Henry Paulson, Emergency Economic Stabilization Act of 2008, Goldman Sachs
  • Pages : 2 (669 words )
  • Download(s) : 54
  • Published : April 13, 2013
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The theme of moral hazard comes up numerous times throughout the movie, Too Big To Fail and is an extremely important factor when considering what happened in September of 2007 and its consequences. By definition, moral hazard is, “the risk that a party to a transaction has not entered into the contract in good faith, has provided misleading information about its assets, liabilities or credit capacity, or has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles” (Investopedia). Basically it’s when others such as these investment banks are careless with the money invested by the people because it isn’t their money or their risk. This was the case throughout many points in the film. First, it is mentioned when they are trying to figure out a way to describe to the public how this mess happened in the first place. Lehman brothers had significant amount of toxic housing assets due to the fact that these banks lowered their criteria for getting loans to achieve the “American Dream” and buying the house they want. They kept making money on these loans and with the housing market going up, they wanted to make more. This was a reason they lowered their criteria for loans and thought that this was “too big to fail” and the housing market wouldn’t go down. Once the housing market did decrease and the people with the loans couldn’t afford to pay them anymore they defaulted. The banks were left in serious debt and no way to get out of it do to their greediness in the beginning with others people’s money. This brings back the term, moral hazard. People trusted the banks in that they know more about the housing market and the finances involved more than they do and they thought it would be alright to have bad credit and almost no down payments if it meant they get the house they want and are being allowed to do so. The banks were making too much money for them to stop and it wasn’t their money so they were even more...
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