A whole new sort of moral hazard?

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So now federal regulators are in a bit of a bind. If they let Wells Fargo ride in and snatch Wachovia out from under Citigroup, they get a better deal for taxpayers—an industry-on-industry solution with no government backstop.

But that might send a dangerous signal to the market. Setting aside the issue of whether or not a Wachovia-Wells deal would be illegal under the terms of the agreement Wachovia made with Citi, we’re still left with the situation where deals made under the direct supervision of the feds are subject to change. Citi came to the rescue of Wachovia in the middle of the night. If the deal they reached is allowed to be shoved aside, what happens the next time Citi, or another potential white knight, gets the call for help?

I’ve already been having some shaky feelings about how comfortable we are at changing the rules of the game these days—short selling bans, mark-to-market accounting rule rewrites, discussion about letting judges adjust first mortgages in bankruptcy court.

Desperate times call for desperate measures, I know. But when it comes to something like the enforceability of contracts, isn’t that bedrock to the whole notion of capitalism?