Moral Hazard

What is “moral hazard,” that which Michael Douglas had talked about? In view of the movie “Wall Street,” moral hazard comes about in a principal and agent dilemma, where the agent, takes action for another, known as the principal. The agent is more informed concerning the actions or intents surrounding the nature of business, since the principal may not be able to fully keep an eye on the agent. The agent may have a reason to do something incongruously in the eyes of principal if the interests of both parties are not on the same side.

Simply put, shady Wall Street investment financial institutions are capable to hustle valueless home mortgages and promote them as Credit Default Obligations (CDOs) to parties who invest. They will just be told they’ll make lots of cash through them, at the same time the investment houses are aware, that they were putting toxic paper in the market. The more immense moral hazard was that the bundled lethal paper that was put up for sale, in company with Credit Default Swaps and other spin-offs, would boomerang sooner or later and cause a credit crunch not only in the United States but the global industries as well, which could feasibly bring about a devastating total economic breakdown.

However, the shrewd guys in Wall Street are aware their foolish actions could cause alarm to the government, inform it that the world financial system would collapse in just days, and be simply relieved of their money owing.

Wall Street now is like a company of gambling casinos. The money in Wall Street was not at risk, but other people’s money was on the line. This includes the American taxpayers, big and small corporations like the American International Group (AIG), acquisitive and foolish enough to underwrite for the investment bankers risky Collateralized Debt Obligation (CDO’s) and deck of by-products. They all had their share of the pain and sought help from the U.S treasury and world financial advisers and other countries, as they falter until these days hovering on economic failure and bankruptcy.

According to then Treasury Secretary Paulson, the uppermost five investment financial institutions and firms like the American International Group (AIG) were too enormous to go on the blink and because their breakdown may devastatingly cause a global systemic collapse. And in actual fact, they attested it by observing the downturn of Bear Stearns, keeping an eye as its stock plunged from $75 per share to $2 a share, in conjunction with a selling of its building, within weeks. AIG got $185 billion by way of these types of transactions which only took off out the back door to the investment banks it had money owing extreme amounts to overblown derivatives which values it had sightlessly covered in its boorish interest of obtaining huge revenues.

Consequently, the financial system is observed to be stagnant in the market analysis. Rates of joblessness maintains at ten percent on the record. In consideration of the cumulative figure for the past number of years, it looks more like sixteen percent, not much changed compared to the Great Depression ages ago. As the movie “Wall Street” presents, investment banks in the industry, despite all these terrible realities and monopolizations remain to pass off something like fifty percent of their income in bonuses for the top executives in millions of dollars. Apparently, this is a remuneration phenomenon that continues to happen but not in other businesses.