ON MORAL HAZARDS IN 2009

CURVES AHEAD

As I get ready for a quiet get together with some friends tonight to bring in the New Year, I'm reflecting like so many people on all the extraordinary market and economic events that brought us to the place we find ourselves at the end of 2008.  And something my friend Howard Lindzon said in a post yesterday sticks most in my mind:

"‘...Broke is the new Rich’ is coming into play.

Being broke is your fastest path to wealth in late 2008 and should continue in 2009. If you are rich, you will get poor as this bear market progresses, but if you BE broke, you have a chance.

Why?

Talk to a mortgage broker and find out. If you have money, good luck getting a refinance. BUT, if you bugger off for 8 months you are in refinance nirvana. Who cares what you paid and how underwater your current mortgage is.

If you are a hedge fund, just stop redemptions. Your clients are rich. They can wait.

If you are a really big hedge fund, or Private Equity fund say ‘CERBERUS’, and make a shitty, dumb ass investment in GM/GMAC, just ask the gobbernment to bail you out. Shazam - 20 percent of the profits in your pocket and no responsibility for the losses.

America is upside down heading into 2009. Expect the unexpected."

He puts his finger on the moral hazard investors large and small face going into 2009 and it's pretty amazing how widespread it really is across the financial spectrum (good academic definition of moral hazard here).

Here's hoping we navigate through this minefield relatively intact.

In the meantime, wish you all the very best for the year ahead.