Helloooo Moral Hazard

So I am mega-bank and investing in all sorts of toxic assets. All of a sudden the rug is pulled out from under me and everything I have invested in (bet upon) turns out to be pretty much worthless. Fortunately, my good friend from Goldman Sachs (GS) has a nice high level government job and he and his friend, let's call him Uncle Ben, are willing to save my arse from all the extreme troubles I have caused for myself and my shareholders.

They provide billions - oh I mean trillions - in support for me and my compadres. This is fantastic. I make tons of money and everything is fantastic; I lose tons of money and the government makes everything fantastic. Sure there is a bit of bad press about executive comp and bonuses, but we are a smart lot and can work our way around that. Thank you Uncles - as in Ben, Hank and Sam. You guys are great!! By the way, where did you get all the money we sucked away from you to support our bonuses?

Folks, this is making me sick. The companies that brought us here are making a mockery of our government support efforts. There is no company too big to fail - period!! Yes, the failure needs to be controlled with government support but companies abusing the process should fail and have to fail. At a minimum they have to be acquired by the taxpayers, taken apart and sold off in pieces.

None - ABSOLUTELY NONE - of the companies should be allowed to profit off taxpayer dollars, be it from their own taxpayer support or the support for their counterparts. For example, Goldman Sachs was repaid billions in obligations from AIG which was paid by taxpayers at a time when GS was paying some major salaries and bonuses. We, my friends, need a (merrily) lynch mob. Government officials giving multi-billion dollar gifts to their former companies is not going to serve them or the taxpayers.

I am really upset (and I would say this differently but this is a family oriented blog). The bigger issue to me is not the trillions we have wasted on the AHOs (I saw this sign today on an AHO construction company) that got us here, but the moral hazard this has created.

Let's face the facts, the current bounce or recovery is just a government spending, government debt, induced bounce. That aside, the last bubble was due to certain financial companies not playing by the rules, not following basic economics and not caring about any of this. Their God was the almighty dollar and they pursued it with reckless, and I mean reckless, abandon. Now that we (as in taxpayers) have saved their collective arses, we are all in a world of hurt in the country to come. The abuses will continue and be magnified to a magnificant level. Wait and see. Meanwhile, read this.

Why would we do this to ourselves? Seriously, folks, the proper response is absolute outrage. Extreme outrage!!! Our taxpayer money, and trillions of it, is now gone with a familiar flushing sound behind it.

And where does this leave us? A lot of AHO financial institutions that got us here are surviving while thousands of worthwhile U.S.companies are folding. U.S. debt, total private and public, is still setting new records (so much for deleveraging). Unemployment is still rising - though at a slowing rate. There is no clear economic recovery in sight, though all the financial instutions are there (with our dollars) to lend if any company actually becomes worth lending to. Commercial backed realty is still on the decline, with no help from the financial institutions that got us here. And I see green shoots everywhere I look. Okay, on this last line I fibbed just a smidge. I did a lot of weeding this weekend and maybe those are the shoots in my memory.

Disclosures: None.

Comments

[John McLeod:]

You might like to read "Moral Hazard" (2002), by the 60s radical Australian feminist poet Kate Jennings.
www.complete-review.co...

Great insight into MH, and another takeaway was that not only are the IBs joined at the hip to Washington but, if possible, even more so to Langley. Conspiracies? The powers that be aren't even bothering to hid their conspiracies any more.

WSJ 8/10: online.wsj.com/article...
"Direct Edge began life as Attain ECN, a struggling electronic platform that was sold to Knight Capital Group Inc. (NITE) in 2005; after a rebranding, Goldman Sachs (GS) and Citadel Investment Group joined as stakeholders. / / The company’s adoption of flash orders - cribbed from a similar practice in options markets - helped Direct Edge gain a foothold in U.S. cash equities."

Aug 12 01:24 PM

[rpost:]

Amen brother. Its not defined as a crime, but it certainly is one

Aug 12 01:34 PM

[D. McHattie:]

Those trillions have to come from somewhere.

When the Fed prints trillions it cheapens the value of all dollars in existence and it enriches those to whom the trillions have been given (ie: banks).

We are watching Rome burn.

Aug 12 02:22 PM

[notsosmart:]

i will repeat it. the monopoly money should have printed on it as the motto"too big to fail,too many to jail".made-off is a piker compared to all the wall st scoundrels. by the way the new aig ceo is on vacation.LOL

Aug 12 04:33 PM

[Fat Squirrel:]

Superb article, Craig! I'd be the last to take issue with any of the points you raise. Oddly enough, it was your photo that reminded me of the one thing that bothers me the most about this fiasco: that many of those who will ultimately pay for these knee-jerk "solutions" had no representation in the process, nor did they participate in any of the decision making that led to the meltdown, nor did they benefit from the (fleeting) fruits of the credit-induced boom. I am of course referring to our children, and their children, and their children...

How is it even REMOTELY moral to saddle unborn generations with the consequences of our greed, profligacy and outright stupidity? Since when did we decide that the Treasury's printing press can magically flatten out the undesirable parts of the business cycle by making whole those who made really dumb decisions at the expense of those who didn't? As your article suggests, these guys are raising Moral Hazard to a High Art.

In the fog of "urgency" and "crisis" all manner of Trojan horse "solutions" have been foist upon current and future generations. Let's consider a recent example: the high-sounding “American Recovery and Reinvestment Act of 2009 ” (obviously the hacks naming these bills are well-versed in Orwell). Practically every word in the bill's title was misleading: We don't “blow other people's money like drunken sailors” rather we “invest” it. Pass this bill and you're ensuring an “American Recovery”. And never mind the fact that most of the bill's “stimulus” won't even be disbursed in 2009 (in sharp contrast to the Chinese stimulus bill which was far more accurately named). But I digress.

The essence of the sales strategy was to bundle up all of the politically-motivated spending plans politicians have been sitting on for years as a “stimulus plan” (think hot dogs or sausage). Then “stimulus” plan was pitched to a panicked public, and their representatives, as the being sole alternative to financial Armageddon using the evergreen “false choice” scam: pass our plan now -OR- the economy will collapse (the fallacious implicit premise being that these are the only two alternatives).

Advocates adroitly used the “urgency of the crisis” to quash any objective analysis, discussion or consideration of the details of these 'stimulus plans' by insisting that “we must act NOW, we can't afford to haggle over the details”. If we “miss the window of opportunity” all will be lost. If you don't vote for our bill, then your voting for an economic depression. You're either part of the solution, or part of the problem. One false choice after another. A massive spending bill consisting of hundreds of pages was then presented to lawmakers on the evening before the day of the vote. The most amazing thing to me is that these rather blatant pressure tactics paid off in spades (yes, I admit that I still suffer from a measure of political naivete).

During the sales process we heard politicians openly gloating about the deftness with which they were exploiting this crisis to achieve many of their long-held political objectives (the majority of which seemed to involve spending tax dollars). The searing quotation "You don't ever want a crisis to go to waste; it's an opportunity to do important things that you would otherwise avoid" is one that should live in infamy as the country contends with budget deficits over $1 trillion for years to come.

I don't mean to be partisan here, I'm a marginal Libertarian for those who care, everything I've written applies equally well to the way TARP was sold, as well as the bank bailouts, the foreclosure mitigation plans, etc, etc.

In the case of TARP, the 'crisis' sales pitch led to the biggest bait-and-switch scheme in recorded history. In spite of its name, it hasn't purchased a nickel's worth of toxic assets yet and has since morphed into a sort of Treasury Dept. slush fund for whatever they feel like doing at the moment. It has also apparently helped fund massive bonuses to people in the financial sector who were at the very heart of the mess we're now trying to clean up (eg Treasury → AIG → GS, etc). The implicit message being sent by the passage of these bills to prospective malefactors is incalculably damaging.

I believe that the vital lesson here is to understand the mechanism by which this stuff is repeatedly being sold to the public: it's always done under the (real, hyped or imagined) sword of crisis. If we can learn to recognize this tactic when we see it, perhaps we can avoid being “taken” again. As far as I'm concerned, your anger is entirely justified and, I suspect, widely shared. If only there were some sort of Lemon Law we could invoke to selectively rescind parts of these bills!

Aug 12 08:14 PM

[Joyful Alte...:]

You wonder where the extreme outrage is. Well, in these parts it's outraged grayhairs storming Arlen Specter's town hall meetings to denounce government takeover of Medicare!

By and large, all anybody knows is what the mass media will tell them, which isn't anything that will affect the ownership of the mass media. For example, Keith Olberman of MSNBC was told by the network brass to stop picking on a Fox News host because Rupert Murdoch was retaliating by publishing stories about GE sales to Iran. So don't blame ordinary people for not reacting to what they don't know about.

Aug 13 02:55 PM