The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.NEW YORK ( TheStreet) -- In a recent blog post, we argued that, despite her credentials, Christine Lagarde may not be the best choice for heading the International Monetary Fund (IMF). This is because of her bias to protect the French, German and European banks from the losses they will have to take in a Greek default. We also think she will pursue the same "extend and pretend" policies that were put in place a year ago rather than face up to the fact that we are dealing with insolvency, not temporary illiquidity.
The Moral Hazard ExpectationIt is clear that Greece will never be able to repay its debt in today's euros, and European banks are clearly in jeopardy. Yet the market has yawned, and European bank equity values have been untouched. A comment received from a colleague regarding that blog post read, in part:
If she [Lagarde] gets into position and kicks the ball down the road a ways, it will only be to give these big banks a chance to off-load and write-off Greek credit over a few years which will make it more palatable when the time comes to restructure.The market appears to have much the same attitude expecting the governmental institutions to save the "systemically" important financial institutions. Moral hazard is now the expectation. Not only are all depositors implicitly protected, but so are the shareholders, bondholders and the managements. We always thought that investing was a risk-reward business. Investments that fail are supposed to penalize the investor through a monetary loss. There isn't supposed to be a floor of book or par value supported by public funds.