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[Time] 8:57
The management themselves are stockholders, often. Surely they don't want to be wiped out. Correct. That's where we get back to the moral hazard issue. Not excessively greedy; rather were responding to the incentives they confronted. Creditors expect to be protected, so they have no incentive to worry about the risks the company is taking, which is another way of saying that risk-taking is mispriced. It's priced too low, and when something is priced too low, too much of it will be taken on. That's what happened in some of the high-profile cases in the last couple of years. Some large institutions avoided the problems--didn't go out of business or require bailouts, but did suffer declines in equity values for the present time. Conversation with Paul Romer: salary. Downside risk--don't want their equity to be wiped out. But they usually can't cash in their equity. When they lose hundreds of millions when their stocks fell, comforted by the fact that they couldn't have cashed that out when they were high; and secondly, they made large sums of money in salary along the way; and they did sell some of their stock in the good times. Diversified the rest of their assets; making $10-20 million a year and using that to diversify into safer assets. Not stupid; not greedy. Prudent with their own money. Strange to believe that people are more greedy in the first decade of the 21st century than they were ten or thirty or forty years ago.
Gary Stern on Too Big to Fail | EconTalk | Library of Economics and Liberty
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