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Unformatted text preview: b.i.3.b.iii. insurance (CDO’s & CDS’s) b.i.3.c. transparency b.i.3.c.i. free-rider problem b.ii. Moral Hazard: after fact ‘behavior change’ => take on more risk b.ii.1. Driving habit in rental car vs. own car; investing other’s money vs. own b.ii.2. Equity Funds used in higher risk activities or personal use b.ii.2.a. Principal/Agent problem b.ii.2.b. Solutions: Align incentives b.ii.2.b.i. Require mgr to ‘own’ significant shares with sale restrictions b.ii.2.b.ii. Avoid options b.ii.3. Debt Moral Hazard funds asymmetric risk borrowers keep gains; creditors eat losses b.ii.3.a. Solutions b.ii.3.a.i. Restrictive covenants b.ii.3.a.ii. Monitoring b.ii.3.a.iii. Net worth maintenance b.ii.3.a.iv. Bank with lender c. External monitoring ( limits to regulation) c.i. Expensive c.ii. Gains to cheating c.ii.1. Bernie Madoff c.ii.2. Allen Stanford c.ii.3. Bernie Ebbers – MCI World/Com c.ii.4. Enron...
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- Winter '10