Oct 11, 2010
First, let’s see wiki’s definition of moral hazard. The last paragraph seems to best sum it up: “moral hazard also arises in a principal-agent problem, where one party, called an agent, acts on behalf of another party, called the principal. The agent usually has more information about his or her actions or intentions than the principal does, because the principal usually cannot completely monitor the agent. The agent may have an incentive to act inappropriately (from the viewpoint of the principal) if the interests of the agent and the principal are not aligned.”
In other words, crooked Wall Street investment banks can bundle worthless home mortgages and peddle them as Credit Default Obligations (CDOs) to investors, telling them they’ll make money on them, while the investment houses knew, that they were selling toxic paper. The larger “moral hazard” was that the accumulated toxic paper that was sold, along with Credit Default Swaps and other derivatives, would backfire eventually and cause a credit crunch in US and world markets, which could conceivably lead to a total economic collapse.
But the wise guys of Wall Street knew that despite their irresponsible actions they could panic the government, tell it that the world economy would crumble in days, and offload their debt, like taking off a backpack.
In a way, you could rename Wall Street, Slot Street, as in the slot machines you find in casinos, because the once respectable white shoe investment companies had now become exactly that, gambling casinos. Wall Street’s money wasn’t on the line, but OPM (other people’s money) was, including the US Taxpayer’s as well as investors.’ Even corporations as large as AIG, greedy and dumb enough to insure the investment bankers flukey CDO’s and deck of derivatives, felt the pain big time and cried for help from Uncle Sam, as they tottered and still do on the brink of bankruptcy.
Also we, the great unwashed, were told by then Treasury Secretary Paulson that the top five investment banks and companies like AIG were “too big to fail,” because their failure could trigger systemic collapse. And indeed, they proved it by allowing Bear Stearns to fail, watching its stock plummet from $75 a share to $2 a share, along with a sell-off of its building, in a matter of weeks. The $185 billion that AIG received literally flew out the back door to the investment banks it owed outrageous sums to on inflated derivatives whose values it had blindly covered in its ignorant pursuit of profit.
As a result, the economy is stagnant. Unemployment remains at nearly 10 percent officially. And if you consider the cumulative figure for the past several years, it’s more like 16 percent, not much different than the Great Depression’s. So, what can we do about those Wall Street investment banks that despite it all are still passing off roughly 50 percent of their revenues in bonuses to their top executives, a remuneration-phenomenon that exists in no other businesses?
This article was posted: Monday, October 11, 2010 at 8:55 am