Surprise: Moral Hazard Really Was Hazardous
Jul 18th 2012 2:58PM
Updated Jul 18th 2012 3:50PM
In the midst of the crisis in 2008, the concept of "moral hazard" was a topic of many debates. However, "too big to fail" trumped moral hazard concerns, and the bailouts commenced. Over the ensuing years, we've seen exactly why moral hazard was a significant concern. Nobody learned a darn thing, and the litany of stupid banker tricks has continued unabashed and unabated.
Moral hazard is an economic term with roots in the insurance industry. Basically, it refers to the likelihood that individuals or entities will perform dangerous, risky acts because they know they have protection -- a cushy safety net -- if things go amiss.
Now we have proof: Supplying safety nets to sociopaths is for suckers.
Hey, big boy
The recent scandal regarding Barclays' (NYS: BCS) manipulation of the key LIBOR interest rate is just one more sign of an industry that failed in so many ways in 2008 and somehow never got the memo.
The entire financial industry is apparently full of individuals who are arrogant, wouldn't know an ethical concern if it bit them on the fannies, and are utterly incapable of even writing a decent enough email to leave us all quaking at their evil brilliance. (Widely quoted excerpt from a real Barclays email: "Done... for you big boy.")
Federal Reserve Chairman Ben Bernanke has said the LIBOR rate is structurally flawed, which is unfortunate since it is used as a benchmark for trillions in business and consumer lending. JPMorgan Chase (NYS: JPM) , Bank of America (NYS: BAC) , and Citigroup (NYS: C) are also under investigation for the possibility of similar shenanigans.
The attitude is awfully similar to the ridiculous arrogance and elementary-school-style email missives recently revealed from the investigation of the historic Lehman "the Bros always wins" Brothers bankruptcy: "Absolutely, will and skill always win, and that be us!" And of course, we all know now that not be them.
Granted, Lehman was allowed to fail, but, in a mindboggling turn of events, that wasn't enough to scare the sweet bejesus out of the remaining too-big-to-fail banks that received bailouts.
If you really think about the ramifications of the current LIBOR scandal, we face another crisis of confidence brewing in the financial markets. It's simply not comforting to hear this exchange that Reuters reported took place between a Barclays employee and a British Bankers Association rep:
Barclays employee: "We're clean, but we're dirty clean, rather than clean-clean."
BBA rep: "No one's clean-clean."
Wanted: Serious housecleaning
The dawning idea that maybe none of these folks are "clean-clean" doesn't lend much confidence to our economy and its transactions, does it? Meanwhile, signs mount that Wall Street and big financial companies that also want to walk that walk are simply up to the same-old, same-old.
The disgraceful situation surrounding the Facebook IPO was good example that nothing ever seems to change on Wall Street.
Add that to today's news that the Consumer Financial Protection Bureau's first target is Capital One (NYS: COF) , due to call center vendors who pressured and misled consumers into adding on unnecessary, fee-based services when activating their credit cards. But hey, maybe Capital One needs as much money as it can get its hands on in order to buy up companies like ING's American unit and join the gluttonous ranks of too-big-to-fail banking institutions.
JPMorgan's Jamie Dimon was long viewed as a rare positive figure on Wall Street, but the recent scandal involving the multibillion trading loss has thrown his reputation into a very bad light. It also implies that maybe none of these people have any idea of what they're doing.
Yep, we need some housecleaning. Does anyone have a sand blaster? Economic transactions rely on confidence. This pack of suited-up miscreants aren't doing us any favors, and it's no wonder that regular Americans have little trust for banks, regulators, and big institutions of all kinds.
Furthermore, anyone who has ever entertained the notion that we could ever have anything close to a free market should take their turns occupying Wall Street. Many of the bankers and financiers gain sympathy due to the free market argument, but their basic bottom line is whatever helps their own basic bottom lines. How many times do they have to show they're simply mercenaries before everyone gets it?
No more Monopoly money or "get out of jail free" cards
We now know the true ramifications of the moral hazard that was often mentioned in 2008. Real accountability is sorely needed in an industry that has gone without for far too long.
JPMorgan Chase's recent vow to claw back some executive compensation related to its trading loss is a step in the right direction. However, we need far more clawbacks, far more long-term incentives to do the right things, and far, far more harsh penalties for immoral and illegal actions.
We also need far more jail time for fraud. I'm sure those lovely for-profit prisons would welcome the new business line. A little fear might be good for those who think "dirty clean" is close enough in the financial industry.
Check back at Fool.com every Wednesday and Friday for Alyce Lomax's column on environmental, social, and governance issues.
The article Surprise: Moral Hazard Really Was Hazardous originally appeared on Fool.com.Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Citigroup, JPMorgan Chase, Bank of America, and Facebook. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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