Marginal Revolution's Alex Tabarrok rightly points out on how the recent bailout of the US financial system has translated to a moral hazard dilemma, as in the recent case of a government protected institution in Citibank "lending" to Dubai.
Mr. Tabarrok writes, ``The problem of moral hazard is often written off as a problem for "the future," less important than dealing with a present crisis. Not so. The bailouts may have encouraged more lending to other places that were perceived as good bailout prospects."
From New York Times' Andrew Ross Sorkin (bold underscore mine): That fact was overlooked by many investors who didn’t want to miss out on a quick buck. What about the risk? The view was, and apparently still is, that if Dubai gets in trouble, its oil-rich neighbors in Abu Dhabi will bail everyone out to avoid damage to their collective reputation and, by extension, the region’s economy. Just as the United States stood behind its banks, in part, to avoid losing the confidence of foreign investors, Abu Dhabi might have to do the same.
``That had to be what Citigroup, with its firsthand expertise with bailouts, must have been thinking when it lent $8 billion to Dubai last year. Oh, and here’s an interesting fact: Citigroup made the loan to Dubai on Dec. 14, 2008. Take a look at the calendar — that’s after it received tens of billions in TARP funds. Citigroup’s chairman, Win Bischoff, said at the time, “This is in line with our commitment to the U.A.E. market in general, and reflects our positive outlook on Dubai in particular.” Good call."
Mr. Tabarrok writes, ``The problem of moral hazard is often written off as a problem for "the future," less important than dealing with a present crisis. Not so. The bailouts may have encouraged more lending to other places that were perceived as good bailout prospects."
From New York Times' Andrew Ross Sorkin (bold underscore mine): That fact was overlooked by many investors who didn’t want to miss out on a quick buck. What about the risk? The view was, and apparently still is, that if Dubai gets in trouble, its oil-rich neighbors in Abu Dhabi will bail everyone out to avoid damage to their collective reputation and, by extension, the region’s economy. Just as the United States stood behind its banks, in part, to avoid losing the confidence of foreign investors, Abu Dhabi might have to do the same.
``That had to be what Citigroup, with its firsthand expertise with bailouts, must have been thinking when it lent $8 billion to Dubai last year. Oh, and here’s an interesting fact: Citigroup made the loan to Dubai on Dec. 14, 2008. Take a look at the calendar — that’s after it received tens of billions in TARP funds. Citigroup’s chairman, Win Bischoff, said at the time, “This is in line with our commitment to the U.A.E. market in general, and reflects our positive outlook on Dubai in particular.” Good call."
Chart from Wall Street Journal.Should Dubai default on the $8 billion of debts to Citi, guess who's gonna pay for the losses?
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