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The Honolulu Advertiser
Posted on: Monday, May 12, 2003

EDITORIAL
Some Isle firms move toward moral hazard

"Moral hazard" is a term The Wall Street Journal is deeply fond of, a term implying that the prudence of a corporation is proportional to its willingness to face its obligations squarely.

That is, a company makes a business decision and then must live with the consequences of that decision, good or ill. It is not a matter of "morality" in the personal sense, but rather the idea that each business decision carries with it risks.

Moral hazard, breached, suggests a business world in which firms take risks based on the expectation that someone will bail them out if they guess wrong and come up short.

Hawai'i businesses run a gamut from implicitly trustworthy if slightly stuffy local companies to kama'aina-sounding Bishop, Baldwin, Rewald, Dillingham and Wong Inc., which was run by an outright crook.

The Rewald firm was an exception, an outright Ponzi scheme. Most Hawai'i businesses are inherently honest.

But we don't have to look far these days to find local corporations lurching dangerously toward the wrong end of the moral hazard spectrum; that is, making business decisions but being unwilling to live with the consequences.

Again, this isn't a matter of dishonesty or immorality; it is being unwilling to accept the consequences of a business decision.

• DFS-Hawai'i, which claimed inability to pay tens of millions of dollars in contracted rent to the state for its airport stores. Arguing that the state dare not let its airport outlets close because they are important revenue generators, DFS talked the Legislature into a bill that offers substantial relief from its obligations (a bill we trust Gov. Linda Lingle will veto). Yet it managed a $100 million payment to its part-owner, LVMH Moet Hennesy Louis Vuitton.

• In a parallel situation, Hawaiian Airlines pleads that it might fail as a needed interisland passenger carrier if the bankruptcy court were to place it under a trustee. At least one aircraft leasing company, Boeing, clearly feels present management has shown it is unlikely to meet its obligations.

Hawaiian recently managed a stock buy-back program that left its owners in good shape, even as employees agreed to pay cuts and customers saw higher prices and diminished services.

And just before filing for bankruptcy, it transferred $500,000 to its parent company.

• From a different perspective, this analysis could also apply to Hawai'i's gasoline wholesalers, Chevron and Tesoro. They are not asking for help, but they are objecting to governmental consequences caused by their own decisions — in this case the decision to collect legal but excessive profits for years, as a state antitrust lawsuit against them demonstrated last year.

In response, the state proposed price regulation, a prospect Chevron called "one more example of the deteriorating business climate in Hawai'i, and another reason why companies will not risk investing in Hawai'i."

So, in each of these instances, these firms are asking to be relieved of consequences of their own behavior.

In this era of scandal caused by venal corporate behavior, even the most conscientious and public-spirited businesses must struggle to keep the trust of their customers, employees and stockholders.