This Thing Called “Moral Hazard”

While, by definition, we’re not at this point in recession, could it actually be that we’re already looking at the taxpayer bailing out heavily-leveraged businesses?

First, here’s from Bloomberg yesterday:

The title (operative words being “already in dire straits”):

Shale Drillers Are Staring Down Barrel at Worst Oil Bust Yet

  • They can’t count on Russia, OPEC to bail out market this time
  • Before the virus, U.S. drillers were already in dire straits

 Here’s from the text:   emphasis mine…

“After burning through hundreds of billions of dollars in cash over the past decade, the industry has consistently disappointed investors while accumulating huge debts. It now finds itself backed into a corner, increasingly shut out of capital markets. Banks were already poised to cut credit lines after writing off as much as $1 billion in shale loans last year, more than they have in 30 years of making them.

Here’s today’s title (which largely explains today’s rally in stocks and junk debt):

White House Likely to Pursue Federal Aid for Shale Companies Hit By Oil Shock, Coronavirus Downturn

I get it, but there’s this thing called “moral hazard.” 

Emphasis mine…

Definition: Moral hazard is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost. It arises when both the parties have incomplete information about each other.

Description: In a financial market, there is a risk that the borrower might engage in activities that are undesirable from the lender’s point of view because they make him less likely to pay back a loan.

It occurs when the borrower knows that someone else will pay for the mistake he makes. This in turn gives him the incentive to act in a riskier way. This economic concept is known as moral hazard.

There’s also this thing called capitalism, where risk is rewarded when well calculated, and paid for (by the party taking the risk!) when not. Hmm….


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