Skip to main content

Moral Hazard
Definition --

The risk that the presence of a contract will affect on the behavior of one or more parties. The classic example is in the insurance industry, where coverage against a loss might increase the risk-taking behavior of the insured.

Imagine you're allowed to take out Fire Insurance on your neighbor's house ... is there any increased "incentive" for you to invest in a gallon of gas, a dark mask, and a lots of extra kindling?

Well that's "Moral Hazard"  -- a potentially profitable contract, that induces someone to change their behavior, in order to acquire quick profits.  Wall Street has turned this into a very derivative art-form.  They are constantly churning those odds -- at lightning speed sometimes. Get in. Get out. Make another ten thousand bucks. Easy money, if you can afford the ante, to get into the game.

And all that unregulated "Moral Hazard" is essentially what was induced by the volatile combination of Liar Loans, Mortgage Backed Securities, and Credit Default Swaps -- contracts meant to insure the "remote chance" that some of those home-owners might someday "default", during one of those scheduled ARM-reset balloon-payment periods.

Fat chance, right?  They were betting on it.

LINGO: Moral Hazard

Is there any "hazard" to pension-fund MBS "bag-holders" trying to collect on their AAA Investment insurance, from far too many under-capitalized Swap insurers?

Is there any real risk that those morally-bankrupt CDS Insurers wouldn't all just file Chapter 11, when all their insurance "markers" all came due, all at once?

You bet there was.  And guess who ended up paying off the lion's share of their hazardous Casino tabs?  

No Risk, No Profit ... as they say in Vegas (or is that 'guts and glory', I forget.)

Well the outrage of the American Public, finally being let out of their dark mushroom gardens, may just be taking that concept of "moral hazard" and using it to their own personal advantage, against their Banker crypt-keepers ... Apparently two can play at, this Risk-avoidance game ...

Message to Mortgage Banks and the Feds: It's Time to Take the Haircut
by Nicholas Carroll, --  Oct 20, 2011

The "moral hazard" is worse than you feared: Americans are figuring out that morality changes as society changes, and that morality no longer includes obediently paying the mortgage. So do you want to take your haircut by mortgage principal reductions -- or foreclosures?

That is, are you ready to deal with homeowners -- or do you want your haircut with your heads plucked one hair at a time? Because principal reductions are the only realistic way left to prevent a flood of strategic defaults and foreclosures.

Mortgage Bankers chronically don't want to work to relieve home-owners from their stifling, underwater Mortgage payments ... Where's the 'quick profit' in that?

Well those home-owners may just end up relieving themselves.  The urgent incentive is there.

Many already have.  Have just walked away.  Oh how morally bankrupt, of them.

Others simply want justice.  Justice for chaos and poverty, that those morally bankrupt sub-prime Loan merchants, callously inflicted on them. Only to have those merchants, cash out and run ... before the damage was even done.

Occupy the mortgage lenders
by Simon Johnson, op-ed, Reuters -- Oct 21, 2011

Talks among state officials, the Obama administration, and the banks are currently focused on reported abuses in servicing mortgages, foreclosing on homes, and evicting their residents. But leading banks are also accused of illegal behavior -- inducing people to borrow, for example, by deceiving them about the interest rate that would actually be paid, while misrepresenting the resulting mortgage-backed securities [MBS] to investors.

If these charges are true, the bank executives involved may fear that civil lawsuits would uncover evidence that could be used in criminal prosecutions. In that case, their interest would naturally lie in seeking -- as they now are -- to keep that evidence from ever seeing the inside of a courtroom.

If the banks were ever really held accountable for the social costs of their behavior, the bill would far exceed $300-400 billion. Realistically assessed, the full downside legal risks to financial institutions are in excess of $1 trillion -- particularly if it can be demonstrated that the “mortgage-backed securities” sold to investors were not backed by mortgages at all, because the proper legal paperwork was never done.

Of course the moral outrage at the moral hazard, will be kept to a minimum, if a DOJ Mortgage Settlement Deal can be cut (at the bargain rate of $20 Billion). And the rest of the current crop of American Mushrooms can continue to be kept in the dark, and continue to be fed a steady diet of "No New Taxes on the Job Creators" platitudes.  In other words, be fed the Media's standard inane BS.

The more the people come out into the light however, and pour into the streets, to say Hell No ... no more ... Enough!

... then the more the "Moral Hazard" of the crypt-keepers is made plainly obvious ... for the rest of the Who's in Mushroom-ville, for them to wake up and suddenly see.

The real hazard for them, is if we stop playing their go-along game ... a game that has far, far too few winners, anyways.  A game that is by designed, based on the Mushrooms, never catching on ... just how much all our hard work has been captured and counter-leveraged, by those unaccountable, merchants of our very dreams ...

Only about once every two or three generations, do enough Mushrooms ever truly catch on ...  the Opportunity usually flickers for a moment, only to see the people eventually settle for mediocrity, to be glad for tokens, and half-a-loaf ... to stoically return to the the well-worn trapping of the Status Quo ... where the moral hazard only haunts our dreams, in those rare times of social outrage and unrest.

Those trapped by poverty, however ... never do find any relief though ...

and their ranks are growing year by year, state by state, job loss after heart-wrenching loss, ... home foreclosure after yet another risk-free bank foreclosure.

Your Email has been sent.
You must add at least one tag to this diary before publishing it.

Add keywords that describe this diary. Separate multiple keywords with commas.
Tagging tips - Search For Tags - Browse For Tags


More Tagging tips:

A tag is a way to search for this diary. If someone is searching for "Barack Obama," is this a diary they'd be trying to find?

Use a person's full name, without any title. Senator Obama may become President Obama, and Michelle Obama might run for office.

If your diary covers an election or elected official, use election tags, which are generally the state abbreviation followed by the office. CA-01 is the first district House seat. CA-Sen covers both senate races. NY-GOV covers the New York governor's race.

Tags do not compound: that is, "education reform" is a completely different tag from "education". A tag like "reform" alone is probably not meaningful.

Consider if one or more of these tags fits your diary: Civil Rights, Community, Congress, Culture, Economy, Education, Elections, Energy, Environment, Health Care, International, Labor, Law, Media, Meta, National Security, Science, Transportation, or White House. If your diary is specific to a state, consider adding the state (California, Texas, etc). Keep in mind, though, that there are many wonderful and important diaries that don't fit in any of these tags. Don't worry if yours doesn't.

You can add a private note to this diary when hotlisting it:
Are you sure you want to remove this diary from your hotlist?
Are you sure you want to remove your recommendation? You can only recommend a diary once, so you will not be able to re-recommend it afterwards.
Rescue this diary, and add a note:
Are you sure you want to remove this diary from Rescue?
Choose where to republish this diary. The diary will be added to the queue for that group. Publish it from the queue to make it appear.

You must be a member of a group to use this feature.

Add a quick update to your diary without changing the diary itself:
Are you sure you want to remove this diary?
(The diary will be removed from the site and returned to your drafts for further editing.)
(The diary will be removed.)
Are you sure you want to save these changes to the published diary?

Comment Preferences

Subscribe or Donate to support Daily Kos.

Click here for the mobile view of the site