The Tower is an official publication of the Georgia Tech Board of Student Publications and is sponsored by the Undergraduate Research Opportunities Program and the Price Gilbert Memorial Library System. This article is from Volume 2.This paper addresses one of the major causes of the sub-prime mortgage crisis prevalent
in large American mortgage houses by the end of 2006. The moral hazard scenario and
consequent malpractices are addressed with respect to the soft budget constraint. This
analysis is done by first looking at the Dewatripont and Maskin model (1995), and
then suitably modifying it to model the scenario at a typical mortgage lender. This simplistic
model provides useful insight into how heightened bailout expectations, caused
by precedent actions by the Federal Reserve, fueled risky behavior at banks who thought
themselves to be "too-large-to-fail."Undergraduate Research Opportunities Program ; Price Gilbert Memorial Library System.Emilson C. Silva, School of Economics, Georgia Institute of Technolog
