Moral Hazard Case Study

Andrew Beattie states moral hazard is “An idea that a party that is protected in some way from risk will act differently than if they didn 't have that protection”. The concept of moral hazard really came to light in the late 2000’s when the United States was on the verge of an economic meltdown. The inevitable crisis was a result of the risky investments made by several of the country’s largest banks on Wall Street in home mortgages, and the manner many of the country’s wealthiest insurance companies had agreed to cover these investments. An apparent government bailout would be needed to prevent the potential economic depression. When moral hazard was applied to the bailouts that would be needed to prevent the looming economic meltdown, one …show more content…
To me, these situations and all the circumstances leaders face within much smaller organizations involving moral hazard must be viewed on a case by case nature. If part of an organization or an individual puts themselves in a poor situation that requires them to be helped, a leader cannot just turn and walk away. A leader must assume that the questionable choices were made with the best of intentions in mind. A leader must also be mindful of the effects of allowing one unit to fail will have on the entire organization, or in the cases that Paulson and Bernanke faced what effect one organizational failure will have on another’s sustainability. I feel Paulson and Bernanke kept the larger picture in mind and managed each situation independently of one another. Paulson warned Lehman Brothers far in advance and when they helped Stearns, the men again warned the banks on Wall Street to be proactive and find a means to sustain their own organizations (2009). Leaders cannot help everyone, but they must attempt to assist in some cases, keeping the bigger picture in mind, and without allowing themselves to be taken advantage