"Moral Hazard" - Taxpayers funded bailout of banks and bond insurers

New York Times is reporting this story:

http://www.nytimes.com/2008/02/23/business/23housing.html?_r=2&ref=business&pagewanted=all&oref=slogin

- $739 Billion loan-defaults in the next five years
- Bank of America wants Government to bail them out of these bad loans (Read you and me will pay through our noses for this bail-out)

There is definitely more to it than looks on the surface. The problem is more pronounced and these banks are capital-impaired and some will fail. So why not let them fail because they created this mess through greedy practices like predatory lending in the first place and such exotic debt instruments as CDOs. And these were off-balance sheet entities they have to carry on their balance sheet. And oh! they carry them on their balance sheet as "mark-to-market" (read we tell you is the fair value :-) Remember the Enron titans Andy Fastow, Jeff Schiling and Ken Lay who invented/used this term to give us the great "Enron"!!

Also why are bond insurers so afraid of being split up and why do banks want to rescue them?
Well, its simple really. The bond insurers split. Their muni bond business will be safe. However the business insuring CDOs etc will go to dogs and hence things will come crashing for the banks, because these "mark-to-market" CDOs on their balance sheets will be almost worthless. And this will cause market crash.

But should govt. rescue these guys with your and my money. Well I think not. Govt. should let some of these guys go to dogs. This will set a good precedent to the inventors of such exotic instruments as CDOs etc. And a govt. bailout is only going to be an incentive for inventing more exotic instruments and more asset bubbles.