Curing Moral Hazard

The religion of the U.S. financial-political ruling elite over the past generation has been “moral hazard,” and U.S. society continued to pay dearly for this abuse of power. Here is a simple first step toward a solution.

U.S. society needs a simple, crystal-clear rule to combat the plague of moral hazard (the concept that one is free to abuse power or commit fraud because one is guaranteed freedom from punishment) that has engulfed the financial sector over the past generation. I propose the following:

Any individual or officer of any institution guilty of committing or aiding and abetting prima facie corruption valued at $million or more shall be brought to trial within one year.

At a minimum, this rule should be implemented by a public courtroom hearing at which the apparent perp must respond to questions, thus offering the court the possibility of convicting the perp for perjury, if nothing else. But two additional benefits would also accrue. First, the individual would be embarrassed, which would serve to warn others contemplating the same behavior. Second, the public would be informed.

This rule would avoid all debate over whether or not guilt existed. Given “prima facie” corruption, one goes to trial (not to a smoke-filled room where the Feds cut a deal that the institution pays a tiny fine and all the individual criminals get to go free). In very plain English, if someone gives the appearance that he has committed fraud, he defends himself in court. Imagine the number of financial folks who would find themselves in court today under this rule! Is there any officer of a major Wall St. financial firm or morgage loan company who would not “qualify?” Indeed, how many Federal regulators would avoid qualifying as having “aided and abetted”?

In case the above comments are insufficiently specific, consider the case of Geithner’s March 2008, precedent-setting decision when running the NY Fed to protect Bear Sterns from well-deserved bankruptcy, a decision that paved the highway straight to the 2008 financial crisis a few months later. Then FDIC chair Sheila Bair explains:

Among the five major securities firms, Bear was the smallest. It was one of the weaker firms that had fed on the subprime mortgage craze in the extreme. Why didn’t the NY Fed just let it go down? I was also incredulous that the NY Fed was claiming that it had legal authority to step in and support the merger, which would protect all of Bear’s counterparties and bondholders. The FDIC was the only agency that had the authority to resolve failing financial institutions…

…Under our rules, if a bank failed, it was put into our resolution process, which, like bankruptcy, imposed losses on shareholders and creditors. If we wanted to “bail out” an institution…we had to invoke something called the “systemic risk” exception. That was an extraordinary procedure….In fact, prior to the 2008 financial crisis, the FDIC had never invoked the systemic risk exception. But here we had the NY Fed going out on its own and deciding to bail out a relatively small investment bank, a perimeter player at best. It was very curious to me, and I was concerned about the precedent….[Bull by the Horns 74-75.]

Now that, to my mind, constitutes a clear case of prima facie corruption all around.

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One comment on “Curing Moral Hazard

  1. Pingback: Too Big to Survive | Shadowed Forest of World Politics

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