Moral Hazard Is More Than a Theory

No good deed goes unpunished.  Bail someone out of a bad decision or conduct, and the odds are that you won’t net gratitude and reform but will earn the right to negotiate another bail-out.  The Comptroller of the Currency has some proof of moral hazard in a December 2008 report.  John C. Dugan, THE Comptroller, offered the following hard data to support the hard truth on bail-outs being ineffective, “After three months (following a modified loan or loan work-out), nearly 36% of the borrowers had re-defaulted by being more than 30 days past due.  After six months, the rate was nearly 53%, and after eight months, 58%.”  The data cover 60% of all first-lien mortgages in the United States, or about $6 trillion in loans.  The questions Mr. Dugan has are:

1.  Did they default again because the loan was bad from the outset?  i.e., the lender made a poor loan that was unfixable?

2.  Did they default because the work-out did not offer enough relief?

3.  Did they default because they used the new padding in their budgets for other purchases and/or debt?

The question the Barometer has is, ‘Why these questions?”  They presume the fault somehow lies with lenders and their origination and work-outs.  Could it be that these borrowers simply made mistakes born of poor judgment?  Could it be that these folks are just not ready for the big leagues?  Those would be the leagues in which you can handle a monthly mortgage payment and that the payment amount allows for some budget cushion.  The federal government is WORKING to bring monthly mortgages payments DOWN to 31% of net income. At 31%, there is still precious little wiggle room in the family budget.  And there is no space at all for a lost job.  You can’t re-work a loan out of too-little or no income.  Sometimes the only remedy for poor judgment is consequences.  Unless and until some folks live through the consequences, the refinement of poor judgment intogood judgment never happens.   

About mmjdiary

Professor Marianne Jennings is an emeritus professor of legal and ethical studies from the W.P. Carey School of Business at Arizona State University, retiring in 2011 after 35 years of teaching undergraduate and graduate courses in ethics and the legal environment of business. During her tenure at ASU, she served as director of the Joan and David Lincoln Center for Applied Ethics from 1995-1999. In 2006, she was appointed faculty director for the W.P. Carey Executive MBA Program. She has done consulting work for businesses and professional groups including AICPA, Boeing, Dial Corporation, Edward Jones, Mattel, Motorola, CFA Institute, Southern California Edison, the Institute of Internal Auditors, AIMR, DuPont, AES, Blue Cross Blue Shield, Motorola, Hy-Vee Foods, IBM, Bell Helicopter, Amgen, Raytheon, and VIAD. The sixth edition of her textbook, Case Studies in Business Ethics, was published in February 2011. The ninth edition of her textbook, Business: lts Legal, Ethical and Global Environment was published in January 2011. The 23rd edition of her book, Business Law: Principles and Cases, will be published in January 2013. The tenth edition of her book, Real Estate Law, will also be published in January 2013. Her book, A Business Tale: A Story of Ethics, Choices, Success, and a Very Large Rabbit, a fable about business ethics, was chosen by Library Journal in 2004 as its business book of the year. A Business Tale was also a finalist for two other literary awards for 2004. In 2000 her book on corporate governance was published by the New York Times MBA Pocket Series. Her book on long-term success, Building a Business Through Good Times and Bad: Lessons from Fifteen Companies, Each With a Century of Dividends, was published in October 2002 and has been used by Booz, Allen, Hamilton for its work on business longevity. Her latest book, The Seven Signs of Ethical Collapse was published by St. Martin’s Press in July 2006 and has been a finalist for two book awards. Her weekly columns are syndicated around the country, and her work has appeared in the Wall Street Journal, the Chicago Tribune, the New York Times, Washington Post, and the Reader's Digest. A collection of her essays, Nobody Fixes Real Carrot Sticks Anymore, first published in 1994 is still being published. She has been a commentator on business issues on All Things Considered for National Public Radio. She has served on four boards of directors, including Arizona Public Service (1987-2000), Zealous Capital Corporation, and the Center for Children with Chronic Illness and Disability at the University of Minnesota. She was appointed to the board of advisors for the Institute of Nuclear Power Operators in 2004 and served on the board of trustees for Think Arizona, a public policy think tank. She has appeared on CNBC, CBS This Morning, the Today Show, and CBS Evening News. In 2010 she was named one of the Top 100 Thought Leaders in Business Ethics by Trust Across America. Her books have been translated into four different languages. She received the British Emerald award for authoring one of their top 50 articles in management publications, chosen from over 15,000 articles. Personal: Married since 1976 to Terry H. Jennings, Maricopa County Attorney’s Office Deputy County Attorney; five children: Sarah, Sam, and John, and the late Claire and Hannah Jennings.
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