Friday, December 9, 2011

Moral Hazard

There will be no private sector involvement. In other words, the banks are too big to fail and public sector wealth will be expropriated for the use of bailing out the catastrophic investment decisions of the wealthy individuals who operate the world's largest banks.   -  Dave in Denver

Moral Hazard - In general:  Circumstance that increases the probability of occurrence of a loss, or a larger than normal loss, because of a change in an insurance policy applicant's behavior after the issuance of policy. It may be due to the presence of incentives that induce the insured to act in ways that incur costs the insurer (but not the insured) has to bear.

Moral Hazard - As it applies to the growing financial crisis:   refers to a situation in which a party makes a decision about how much risk to take, while another party bears the costs if things go badly, and the party insulated from risk behaves differently from how it would if it were fully exposed to the risk.  Moral hazard arises because an individual or institution does not take the full consequences and responsibilities of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to hold some responsibility for the consequences of those actions. (Wikipedia)

Moral Hazard is embedded deeply in the root, the very core, of the global catastrophic financial crisis that continues to accelerate in scope and severity on a daily basis.  Specifically as applied to the United States, the fact that our Government has created and enabled the idea of a bank that is "too big to fail" that will always be bailed out by the public sector - really, each individual Taxpayer in this country - is the perfect embodiment of that exact nature of moral hazard as it applies to the ongoing financial collapse of the United States.

And the contagion is indeed spreading, though not from the Greek source that is readily identified and blamed by most.  Rather, the EU member countries have adopted principles to facilitate the use of public sector money, ultimately to be enabled by additional debt issuance and money creation - aka "QE" - in order to bailout the big banks which control the political process here and in Europe.  In other words, the "contagion" is spreading because moral hazard has been allowed to infect and permeate every aspect of the global financial industry to the point at which it threatens to cause systemic collapse throughout Europe and the United States (and in Canada, from what I'm now hearing).

 "EU Leaders Drop Demands for Investor Write-Offs"
As regards private-sector involvement, we have made a major change in our doctrine: from now on we will strictly adhere to the IMF principles and doctrines,” EU President Herman Van Rompuy told reporters at a briefing. “Or, to put it more bluntly, our first approach to PSI, which had a very negative effect on debt markets is now officially over.
This report from Bloomberg related to the agreement reached by the EU members to "save" the euro describes the decision to use additional debt and public sector funds (taxpayer money) in order to bailout the failed risk-taking endeavors of the largest global financial institutions.  The "spin" put on this by the politicians and establishment-controlled media uses the term "private sector involvement" to describe what is ultimately a decision made by the bank-controlled politicians that the big banks will be bailed out.  Here's the report from Bloomberg:  LINK This is the epitome of moral hazard - the moral hazard which is the terminal cancer destroying the global financial system and ultimately will destroy many countries including the United States.

Please make no mistake about this, the reason that Tim Geithner is over in Europe to participate in the agreement reached last night by the EU leaders is that the biggest U.S. banks are not only exposed to many tens of billion of dollars in actual European sovereign loans, but the risk exposure is magnified into the trillions because of the off-balance-sheet derivatives issued and underwritten by the biggest firms on Wall Street.  For instance, Morgan Stanley's derivatives book grew by $9 trillion in the latest reporting period. This is why Morgan Stanley's stock was down nearly 10% yesterday.  JP Morgan and Goldman Sachs have even bigger derivatives exposure to Europe than Morgan Stanley.  THIS is why the U.S. Government has been involved in the agreement reached last night and THIS is why the Federal Reserve, unilaterally and without any Congressional oversight OR approval, has extended $500 billion in U.S. taxpayer money to help prevent the collapse of the too big to fail banks using the "cover page" of a seemingly complicated tool labelled "currency swap agreement."

This is moral hazard in the extreme.  It's why Long Term Capital, Enron, Worldcom, Global Crossing, Enron, Refco, Amaranth, Bear Stearns, Lehman, Washington Mutual, Countrywide, Wachovia, Merrill Lynch, etc. all collapsed.  One would have thought at the very least that after Enron the system would have been drastically amended, reformed and fixed.  But it was not.  And now the Jon Corzines, Henry Paulsons, Jamie Dimons and Lloyd Blankfeins of the world have figured out how to steal billions from the system and get away with it.  That was the message from yesterday's shit-show on Capitol Hill.  THAT is why our system is collapsing.  THAT is why, if you will, Atlas shrugs.

Have good weekend.  And remember:  try to enjoy what you can, as much as you can, while you can because life in this world at some point is going to become very unpleasant for most people.


  1. well said Dave. Going Galt is pretty much the only options left when nothing in the financial sense is safe anywhere. The logical step of choosing to shift completely outside the current flawed monetary system is a) stop playing the paper games b) take possession of physical gold c) wait as the system implodes on itself.

    My only logical explanation for everything is the system died a long time ago and nothing can be done to fix it, other than a new system.

  2. Nice post, as usual.

    The clock is ticking.

    You people better get the fuck out of stocks, bonds, currencies, IRA's, 401K's and all that other shit.

    Get into silver. Or gold. Take possession of the stuff. You have 2 1/2 years left, max, before total systemic economic collapse in this country.

    Govern yourselves accordingly.

  3. They will save the hypothecated, derivative debt at all costs. Morality be damned!

    Gold will only be demanded for settlement when the paper is of no further utility.


  4. Mr Geithner was there to try and convince the Eur.politicians to start the printing presses at the ECB, supporting Cameron. The latter represented the London fin. district and their Wall Street masters. All have now put themselves "off-side". Mrs Merkel has taken the initiative and imo will refuse to start a European QE. If so, there will be no backstop, a la Bush's Paulson, as the banksters(Geithner)were counting on. Ask Mr Corzine. Rgds Ntombi Joburg

  5. Why Is Eric Cantor Blocking the Congressional Insider Trading Act?

    In a strange and unexpected twist, the Republican leader in the House of Representatives is now blocking progress on a bill that would definitively outlaw insider trading by federal lawmakers.

    The Republican sponsor of the bill in the House, Financial Services Chairman Spencer Bachus of Alabama, had scheduled a markup of the Stop Trading on Congressional Knowledge (STOCK) Act for next week. But on Wednesday, Majority Leader Eric Cantor of Virginia cancelled the markup session.

    Cantor reportedly said he blocked the bill to give Congress more time to examine the issue. Critics of the move, however, fear that any delay could kill the bill entirely.

  6. Listen..Jim Sinclair

  7. I cant even imagine the shenanigans that we don't know about...

  8. This counteracts moral hazard...

    China executes rogue trader, millions still missing

    Conscious that the growing gap between rich and poor could generate resentment, China is battling corruption and stock trading abuses. It has used the death penalty as a deterrent in serious cases.

  9. Most people who are on these blogs already know the direction to go in - We all should thank our lucky stars that we still have time to prepare. Gold is good BUT it is NOT the end all!
    Silver will play as much an important role in black market negotiations for goods and services when the time is right.

    Other important areas to address can now be easily attained where as down the road in a year or two it will be hard to find many things or very expensive such as food, water, sundries, pharmacy items, tools , seeds , etc.

    To a large degree the internet has allowed the opportunity for this whole financial mess to be observed unfolding in slow-mo. A very real opportunity for us all to " Get er done !"- before the lights go out !

  10. morally wrong

    This video explains causal links between OTC derivatives, the financial crisis of 2008, Alan Greenspan, Robert Rubin, Larry Summers, Jon Corzine and MF Global.