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Kellwood Being Bailed Out

Finally, Kellwood, the apparel maker, is getting a bailout. By Deutschbank, no less.

The lender had earlier balked at refinancing Kellwood's $140 million debt. That may be because the lender had also purchased credit default insurance on the the debt. Thus, it had an incentive for the debt to go bust so it could collect the insurance. Perhaps disclosure, and public pressure caused the about face.

One of the problems with insurance is called moral hazard. That is, insurance incentivizes people to do take on more risk because they will be backstopped. Hurricane insurance is one example. Many more people will build homes (and build them more flimsily) in hurricane prone areas knowing that they will be "reimbursed" for catastrophe. Until a hurricane like Katrina destroys so many homes that it destroys the insurance companies.