Private counterparties are a whole different ballgame. They are loth
and slow to pay. Dismayed creditors have learned this lesson in Russia
in 1998. Investors in derivatives get acquainted with it in the 2001-2
Enron affair. Mr. Silverstein is being agonizingly introduced to it in
his dealings with insurance companies over the September 11 World Trade
Center terrorist attacks.
We may more narrowly define moral hazard as the outcome of asymmetric
information - and thus as the result of the rational conflicts between
stakeholders (e.g., between shareholders and managers, or between
"principals" and "agents"). This modern, narrow definition has the
advantage of focusing our moral outrage upon the culprits - rather
than, indiscriminately, upon both villains and victims.
The shareholders and employees of Enron may be entitled to some kind of
safety net - but not so its managers. Laws - and social norms - that
protect the latter at the expense of the former, should be altered post
haste. The government of a country bankrupted by irresponsible economic
policies should be ousted - its hapless citizens may deserve financial
succor. This distinction between perpetrator and prey is essential.
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