When senior management has the choice between screwing themselves by remaining under bonus and salary restrictions, or screwing the shareholders by risking and/or diluting their equutiy – it’s a no brainer.

“The US is going down in a boat ON FIRE with bailouts, moral hazards, debt, corporate socialism! AHHH-meanwhile in the EU…”

That was only half of the lesson. The other half (see AIG) is to make your big mess so complex and opaque that they have to keep the perpetrators around to unwind it.

And, of course, “unwinding” means to bundle up the few valuable assets and sell them at a bargain price to the investment firm you will be working for 6 months down the road.

Deutsche Bank’s four world economic scenarios for 2010. This is #4, which they assign a 10% probability to:
This is the nightmare scenario of Deflation or in less extreme terms perhaps a double-dip. Given that much of the world is currently still in negative YoY inflation territory it is difficult to completely rule out even if we do live in a fiat currency system and even if inflation is expected to return to positive territory in early 2010. For deflation to be sustained we would probably need an exogenous event to hamper the authorities ability to continue to successfully fight this credit crisis. Such events could be a fresh banking crisis arising, a political backlash encouraging immediate increases in economic regulation or withdrawal of stimulus, or possibly a Government bond/currency sell-off that forces the authorities to aggressively reign in stimulus for fear of a sovereign crisis. A Sovereign crisis outside the Developed world could also encourage this scenario as there would be a flight to quality into Developed market bond market in spite of the fact that these markets have their own large fiscal issues. Bond yields would eventually rally strongly but risk assets would experience a very poor year. As time progresses this scenario becomes less likely as the system gradually repairs itself and the authorities are allowed more time to inflate the global economy. As we discuss in scenario 3, the more likely risk scenario is inflation, especially as time progresses.

The part I put in bold worries me. This is where sovereigns are most likely to lie to people with more green shoots nonsense and baked economic stats because they “know better” than the citizens. Regulation and reducing stimulus would strangle global growth, so the bankers’ party line goes.

Bad craziness, folks. Bad craziness.

what happens if the banks come back for more bailout money? the second great recession brought to you by the immoral hazard.