TCAAC 11 - Is greed to blame?

Very interesting though you know the government bailouts actually damage the economy because you are artificially inflating the economy as well. So not only is it costing the taxpayer but it's actually a trade off for one kind of problem with another.

HEXUS.radio4

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Very interesting though you know the government bailouts actually damage the economy because you are artificially inflating the economy as well. So not only is it costing the taxpayer but it's actually a trade off for one kind of problem with another.

Its actually far, far worse than that.

Its a sticky kettle of socialist fish called “moral hazard”.

By saying oh its ok if you screw up, you actually encourage people to screw it up, by taking risks without thinking of the consiquence.

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By saying oh its ok if you screw up, you actually encourage people to screw it up, by taking risks without thinking of the consiquence.

But as far as I can see, the culprits have been taking risks with OUR money, not theirs, and they are now blackmailing us by saying “either you give us MORE money or we let the entire caboodle go to pot”.

This is what incenses me no end.

No its not really that.

The problem is really rather complex, what we've seen is a total complete and utter breakdown of any trust between banks.

This is because far too many a institute had made bad decisions with regards to correlated risk on CDOs, many simply forgot to think that if i own £5B of CDO baskets, the probability of £1B defaulting, means its very likely the other £5B will default. As such many big players lost a LOT of money.

Now that was only the start, the problem is no one wanted to lend money any more, you can see this by looking at LIBOR rates, this is the rate at which the finest credit rated organisations will lend to each other. Its hudge right now. Many people who where in no way foolish about the Credit Derivs market (arguably the root course) lost out because of the high LIBOR, no one 3 years ago was predicting it to go this high, this quickly.

So the vast majority of people hadn't been taking un-nesicarry risks. For instance the fund i work for is UP this year by a very heathly amount. So lets not forget that the problem here was a very few people posioning the well, which far too many people assumed would never happen to such a state.

Now the culprits have been taking risks with who's money? Ours as in UK Tax Payers? Ours as in Investors? This is kind of their job, the idea is that if they make a lot of money, they get to keep some as a performance incentive. If they loose money they get booted out of the door.

So there is the moral hazard that it encorages excess risk, if they screw up, they loose nothing, if they win, they gain a lot. But MANY companies don't have such a simple reward structure, many ensure that people can not spend all of their bonus for 5 years, this means the performance will still have to be good, after they've gone, which demands trust, so these schemes of renumerations are normally reserved for the multi-million bonus'd (desk heads etc).

The people asking for more money are not the people who've lost it due to cronic incompitence, or excess risk taking. If you went back 2 years, and looked at the price of an 2Y American Put Option on the FTSE, 4000 strike it would of been dirt cheap, ie no one thought it was likely to happen.

Finance is ment to be a distrabuted hive mind, almost like a democaracy, if no one is buying a put, or shorting its assumed everyone thinks its going to go up. In the same way i don't have volcano insurance, because i don't think its likely that North London will suffer from one, these people didn't see the need for insuring against such a black swan.