Did they expect to be bailed out?

Whatever happened to reality -- this is like a bunch of little children playing instead of adults.

Did they expect to be bailed out
by Russ Roberts on February 11, 2010
in Financial Markets
I don’t think bankers planned on being bailed out. But I think it affected their decision-making. Jeffrey Friedman doesn’t think so . (HT: Arnold Kling). He argues:

if one actually reads accounts of the decision making in the years leading up to the crisis, such as Gillian Tett’s Fool’s Gold and William D. Cohan’s House of Cards, no decision makers factored bailouts into their calculations. Why? Because they didn’t think they were doing anything particularly risky (an ignorance-based human error), so they didn’t even consider the chances of being bailed out.

Hmmm. Not the best evidence. Do you really expect Jimmy Cayne, the CEO of Bear Stearns to tell a reporter that he threw away his firm’s money because he thought he’d get it back from taxpayers? But here’s what he does tell William Cohan:

The only people [who] are going to suffer are my heirs, not me. Because when you have a billion six and you lose a billion, you’re not exactly like crippled, right?

And then there’s this moment from Andrew Haldane, the Executive Director of Financial Stability of the Bank of England:

A few years ago, ahead of the present crisis, the Bank of England and the FSA commenced a series of seminars with financial firms, exploring their stress-testing practices. The first meeting of that group sticks in my mind. We had asked firms to tell us the sorts of stress which they routinely used for their stress-tests. A quick survey suggested these were very modest stresses. We asked why. Perhaps disaster myopia – disappointing, but perhaps unsurprising? Or network externalities – we understood how difficult these were to capture?

Excerpt: Read more at Cafehayek.com