Comments on: The very real moral-hazard trade http://blogs.reuters.com/felix-salmon/2010/01/14/the-very-real-moral-hazard-trade/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: isely http://blogs.reuters.com/felix-salmon/2010/01/14/the-very-real-moral-hazard-trade/comment-page-1/#comment-11148 Thu, 14 Jan 2010 21:36:34 +0000 http://blogs.reuters.com/felix-salmon/2010/01/14/the-very-real-moral-hazard-trade/#comment-11148 I have over 95 articles on the Obama Blog and I’ve specifically talked about for the last 18 years about the growing derivatives market, from $5 trillion to $681 trillion, which are sold by hedge fund dealers that don’t want to pay any federal income tax. Our president said when he ran for office that he was going to tax them. Just like Hillary Clinton when I met her in Madison, Wisconsin wearing a T-shirt that said “TAX HEDGE FUND DEALERS!” on it. You could tell last night on the news that the bankers have the attitude that they deserve their yearly $10 million bonuses and look where it has gotten us–a dollar that’s declining and a trade gap that’s widening. The local Commercial Banks and the loan officers are what made our country great, NOT INVESTMENT BANKERS. I liked your comments on PBS News Hour. I also write on Twitter, MySpace and Facebook. If we can’t reinstate the GLASS-STEAGALL ACT, THEN BREAK UP THE BIG BANKS!
LaVern Isely, Overtaxed Middle Class Taxpayer and Public Citizen Member

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By: GingerYellow http://blogs.reuters.com/felix-salmon/2010/01/14/the-very-real-moral-hazard-trade/comment-page-1/#comment-11146 Thu, 14 Jan 2010 20:05:36 +0000 http://blogs.reuters.com/felix-salmon/2010/01/14/the-very-real-moral-hazard-trade/#comment-11146 Agree with most of the post, but not this:”Specifically, because the banks’ cost of funds was lower than the interest rate on the triple-A tranches of subprime CDOs, the banks had a huge incentive to borrow as much money as they could and invest the proceeds in those supposedly risk-free bonds. If the banks’ cost of funds reflected their real riskiness and wasn’t artificially kept down by the moral hazard trade, it’s unlikely that the CDOs would have looked nearly as attractive.”

In fact, I’d argue the opposite. Look at the German Landesbanken. In the old days, when they had an explicit state guarantee and hence a very low cost of funds, they were able to engage in low risk, low margin business like public finance and still make a decent profit. As soon as they lost the guarantee though, they started to shift into high yielding assets like subprime CDOs and engaged in off balance sheet activities to boost their return on equity. There’s a reason why the initial vector of subprime contagion was the Landesbanken’s SIVs.

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