The Proof is in the Pudding…

Would you like to see the effects of moral hazard?

The planned overhaul of US financial rules prompted Standard & Poor’s to warn on Tuesday it might downgrade the credit ratings of Citigroup and Bank of America on concerns that the shake-up would make it less likely that the banks would be bailed out by US taxpayers if they ran into trouble again.

The move came in spite of S&P admitting that Citi and BofA, two of the world’s largest lenders, had bolstered their balance sheets with fresh capital and improved performance in recent months.

Changes to government regulation has the potential to push Citibank and Bank of America into bankruptcy.

For those who claimed that it was markets, not government policy, which shouldered the majority of the cause of the financial crisis (not the current recession), what is your underlying model? Can you use that framework to explain this situation?

H/T Garett Jones


One thought on “The Proof is in the Pudding…

  1. S&P shouldn’t have rated Citi or BoA higher than what they intend to now… In my opinion, their rating should have reflected the government’s intervention and they should have been rated lower to compensate. The fact of the matter is that moral hazard or not, Citi & BoA are coming full circle to where they belonged in the first place.

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