The best explanation of why we experienced a terrifying financial crisis 10 years ago, is the ease with which it seems to be taking risks when someone's money dies. # 39; other.

This is a problem often referred to as moral hazard, a term that has been much talked about just after the financial crisis, but not so much lately. Now, 10 years after the worst days of the financial crisis, it is important to stress once again that this is a chronic problem. And it's not something easy to settle with a lot of regulations.

To understand the idea, imagine what would happen if you had to decide the risk to take while knowing that someone else would bear the losses if things did not go smoothly. It looks a bit like "the heads I win, the tails you lose".

Many Americans during and after the financial crisis hated the idea that the federal government supports private financial firms, and that was one of the reasons. These companies hurt themselves by taking risks in housing and mortgage financing and if taxpayers saved them, the argument went, they would simply retry.

The government had to step up its support after the collapse of Lehman Brothers investment bank 10 years ago, precipitating the most frightening week of the crisis.

Perhaps the federal government was at least partly right in avoiding moral hazard and letting Lehman switch over. Yet, a version of the moral hazard problem existed in Lehman, and it proved fatal for the company. And this was happening all along the housing finance chain.

In the mortgage business, it was not the mortgage banker 's money. So, what mattered was not whether it was a good mortgage but if the deal was concluded.

While investment bank-backed mortgage-backed securities proved to have been supported by tranches of the worst mortgages, the bankers who packed and sold the transaction retained their premiums.

If enough business moved south for the investment bank's clients to flee, or worse, like Lehman Brothers, the company was left with too many assets that it could not discharge, shareholders without mistrust were hit.

Of course, many companies strive to manage risks, including investors who buy mortgages only if the originator has promised to take back bad debts. But there were a lot of heads I won, lost tails.

Do not forget that this is not a problem specific to financial services or at this time. Corporate owners, for example, can not really know if insiders are looking for bonuses and promotions using the shareholders' money that they would never risk if it was about their own dollars.

Part of the problem is that many US companies are structured in large public companies. Except perhaps for founding CEOs of the company who never sell a share, anyone who works in any of these organizations can not be considered a business owner at risk.

It's up to the management to set up rules and make sure they're followed, but the incentives for the boss are not very different from those of a rookie banker who tries to close a mortgage. Angelo Mozilo, co-founder of a leader in the 2000 mortgage market called Countrywide Financial, is a good example of this financial crisis.

At the time, a popular product for Countrywide was a mortgage called "pay option". It would seem that the borrower basically has to decide how much to pay each month.

One of the problems is that the owner often has not paid enough to cover the interest due and that the mortgage balance has not increased. As the real estate market became even hotter, the situation worsened as borrowers opting for option payments received little or no documentation.

Mozilo realized that a train crash could occur. He also said – by email to his colleagues.

He owned about 2% of Countrywide during this period, but this included shares that he could get through his stock options. Mozilo then converted the options into shares and sold close to $ 140 million, according to a complaint later filed by the Securities and Exchange Commission.

He had let the owners of his business take the risk.

Mozilo must have felt at home by visiting the big investment banks at the other end of the mortgage finance pipeline. By the time the crash hit, they had long since abandoned the old model of Wall Street partnership and became modern corporations with public capital.

Former Lehman Brothers partner Peter Solomon told the commission that he had investigated the causes of the financial crisis he had met with his Lehman partners in a large hall. They were not particularly hungry, but since they were all together, they had to watch each other closely.

During the boom, Lehman Brothers Holdings, Inc., owned by the public sector, had such an optimized balance sheet that it had only $ 1 of capital to write off losses for every $ 40 invested.

No real partner in the company would have allowed this to happen.

The week after the fall of Lehman, Midtown Manhattan traders, bond sales representatives and investment bankers queued during their lunch break to withdraw money from Citibank and Chase accounts. They knew how bad it was.

John Authers of the Financial Times wrote this month that he saw this happening in front of him and decided not to write anything, believing that the last thing the world needed that week was that a bank seemed to be unfold in the heart of New York's Financial District.

But here is another example of how the problem of moral hazard is common. These bankers could have withdrawn money by packing and selling the worst toxic mortgage securities. Still, by getting accounts below $ 100,000, then the insurance limit of Federal Deposit Insurance Corp., they would not have to worry that Citigroup is out of the crisis.

It was always their money in the bank, it was just not their risk. It was ours

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