As the US government cave in and bail out AIG, those hoping the financial world would be fully re-introduced to the concept of moral hazard may be disappointed. Today, HBOS is next up on the chopping block as the market worries about their significant exposure to the failing housing market. The general consensus is that HBOS is too large for the government to allow it to fall but possibly too expensive for the government to save. It looks like LloydsTSB may be the government’s knight in shining armour, riding in to rescue HBOS-in-distress and returning the “Big Five” banks to four (or a “Big Three” and “Giant One”).
It seems as though the governments have had no choice but to bail out these failing banks (or offer favourable conditions to other banks coming to the resuce). The livelihoods of too many voters were tied up in the big financial messes that they had made for themselves. In fact, some traders have been taking advantage of the guarantees that HBOS wouldn’t go under to make money as the share price fell.
It looks to me like the City have been pretty succesfully pocketed all the profits from the risks they’ve been taking over the last few years but now it’s all starting to tumble and their gambles aren’t paying out, they want the government (and so the taxpayer) to pay out instead.
It’s like they’ve persuaded the owner of the casino to pay out when they win but foot the bill when they lose.