Is it a moral hazard? The bailout of European financial institution Dexia highlights the fragility of banks worldwide, including in the U.S. I already predicted about the collapse of Dexia 6-months back in one of my TV shows.
Dexia’s trading partners include U.S. institutions Morgan Stanley and Goldman Sachs have taken steps to limit their exposure to Dexia and to protect themselves from further problems in Europe as a whole.
While banks can lend less to their troubled counterparts, exposure still doesn't go away in a sense that nobody knows how long previous bailout money will keep the creditors paid whole and the system afloat.
Those who favor such bailouts say they are necessary to preserve financial institutions, while critics say they only encourage shaky lending behaviors to continue, citing those who did business with U.S. insurance giant AIG as Freddie and Fannie Mae were other examples. I am in favor of restructuring and not in favor of bail out since economic cost is very high and above all its the Tax payers money.
Hence, phrases like "moral hazard" and "too big to fail" are grabbing headlines again in the international media.
The question is, did the AIG experience and the bailouts generally contribute to the current situation?
Would the banks "have had a different view in dealing with Greece — or with Dexia for that matter — if those who had dealt with AIG hadn't been made whole?"
Other experts point out that Dexia is not the only bank exposed to iffy European sovereign debt and operating on unfinished restructuring plans from the past. Many more banks might collapse soon.
There is a reasonable likelihood that it could start unwinding, and once that starts it could all go in a blur, meaning an international banking system running into more and more trouble raising the money to operate. BASEL 111 in operation. Happy investing
Disclaimer: This is just a research piece and not an investment advice. All financial transactions carry a RISK