Things That Make You Go Hmmm... Like Moral Hazard

Tyler Durden's picture

A mere 24 hours before the US (at least according to Jack Lew, who, as some of you may have known, is the Secretary of the Treasury of the United States of America) was going to run out of money and default on its obligations (the Lew-styled "catastrophe", which according to the great and the good would once again "bring the financial system to its knees" — how many MORE times are we going to have to listen to that, I wonder?), the S&P 500 was trading exactly 2.30% from its all-time high.

Sound like anybody was worried about financial Armageddon to you, dear reader? Not to me, either, but here's the thing:

The danger WAS very real, as a default by the US on its debt obligations would have gone to the very heart of the "plumbing" that underlies financial markets and caused havoc in the repo market and all kinds of problems with collateral (or at least, what little collateral is allowed amongst market participants once central banks have hoovered up their ever-expanding allotments).

The key clue passed most people by a week ago; but it came from, of all places, Hong Kong:

(FT): Hong Kong’s stock exchange decided the possibility of a US default had made some types of short-term Treasury bonds more risky, prompting it to force traders using the securities as collateral to provide extra backstops....


It came as the Asia Securities Industry & Financial Markets Association (Asifma), which represents banks, brokers and asset managers in the region, warned that any announcement by the US Treasury in advance of a default must arrive before the opening of the day’s trading in Asia to avoid “chaos”.


Japan’s clearing house, the Japan Securities Clearing Corporation (JSCC), said it was in “intensive discussions” to prepare for “anything that might happen”.


Hong Kong Exchanges & Clearing (HKEx) said on Thursday it had taken two measures designed to reflect the increased difficulty of valuing certain short-term US Treasuries amid the debt impasse.


First, its clearing house would apply an increased “haircut" to its valuation of US Treasuries held as collateral against futures trades. For bonds held with maturity of less than one year, that would be raised from 1 per cent to 3 per cent, effective immediately, HKEx said in a circular to members.


“This new haircut shall be applied on a daily basis to determine the value of the US Treasuries allowed to be used as cover for the margin requirements of HKCC [Hong Kong Clearing Corporation] participants,” HKEx said.


“Participants should make necessary funding arrangements to cover any shortfall to their margin requirements resulting from the increase in the US Treasuries haircut.”

Anyone posting US Treasuries with less than a year to maturity as collateral, would need to come up with three times their current posted margin.

Not good. Not good at all. The amount of liquidity this would suck out of a fragile market would be catastrophic very bad indeed, and any forced selling on behalf of those unable to post the additional collateral would be a catastrophe major problem, leading to falling prices and spiking rates — neither of which are allowed anymore. Now, if HKEx's move had become fashionable around the world (and it's safe to say that exchanges are very much pack animals), it would have been quite bad a catastrophe.

After a very subdued reaction to the can being kicked down the road until February debt ceiling being agreed, something rather strange happened on Thursday. See if you can identify at what point in the day it occurred:

(I should point out that the yellow overlay of the gold price looks green where it sits on top of the blue DXY chart. There are only two variables in this chart, the yellow gold price and the blue US dollar price.)

Now, there was already a clue as to what this event was, hidden away in an earlier chart, but (cue drum roll) the catalyst for the dollar's sudden drop and the sharp spike in the price of gold waaaaaaaaaaaas... THIS:

(Reuters): Chinese rating agency Dagong has downgraded the United States to A- from A and maintained a negative outlook on the sovereign's credit.


The agency suggested that, while a default has been averted by a last minute agreement in Congress, the fundamental situation of debt growth outpacing fiscal income and GDP remains unchanged.


"Hence the government is still approaching the verge of default crisis, a situation that cannot be substantially alleviated in the foreseeable future," Dagong said in a press release.

Now those are the straight facts of the issue, but contained within the rest of what was a very short article are three fascinating sentences that speak to the very crux of the problem as things stand today. The first two constituted the very next paragraph:

(Reuters): Dagong's ratings are hardly followed outside of China. The agency also classifies most countries it follows very differently from major agencies such as Moody's, Standard & Poor's and Fitch.

Absolutely correct. Dagong's ratings are seen as something of a joke and very much inferior in nature to the Big Three — a poor man's Egan Jones, if you will.

...So here's where we get to the nub (finally!) of this week's philosophical wanderings.

The question I posed, all those charts ago, was this:

If something bad happens, but nobody reacts badly to it, did nothing bad happen?

Well, with each successfully navigated new crisis, the reaction of the market the next time a crisis flares up becomes more muted. We've seen the spectre of a Lehman-style collapse dealt with, and now the phrase "... could bring the global financial system to its knees..." is shrugged off with alacrity.

We've seen the spectre of a European fracture, a Grexit, a Spexit, and the end of the euro taken off the table by determined governments and central bankers; and now, each fresh outbreak of the European crisis is greeted with apathy and ennui. (I wonder if the French have a word for that.)

And now we've seen the extent of the reaction to the US debt-ceiling debacle the second time around. I would describe it as "quizzical interest" at best.


Because the Nannycrats are continually telling us that everything will be OK, that we shouldn't worry about things and ought instead to just Keep Calm and Carry On.

How bad has it gotten? Well, amidst the "hoo-ha on the Hill" recently, we saw one of the most bizarre things I've witnessed during the mayhem of recent years: Barack Obama's telling Wall Street that they SHOULD worry


Barack, let me explain something to you.

The reason Wall Street WASN'T worrying is that you and Bernanke and Geithner and Paulson (not you, John — Hank) and Yellen and the rest of the Crazy Crew have gone out of your way for five years to make absolutely certain that nothing bad ever happens again. Ever. Why the hell WOULD they worry?


It's YOUR fault that they're not. You just can't have it both ways.

That's what moral hazard looks like, I'm afraid...

Read Grant Williams' full letter below...

Ttmygh 14 October 2013

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Oquities's picture

aint no moral so aint no hazard no mo!

NotApplicable's picture

Guest post tag????

I thought there was a renegade Tyler in the house!

knukles's picture

Morals and ethics, rules and laws only apply to the little guys anymore.
What moral hazard?

We're way the fuck past that, these days.
The whole system is an Immoral Cesspit.

May God help us all, for we're incapable of helping ourselves.

kralizec's picture

Soon our enemies will be driven before us, and we will hear the lamentations of their women.  (Spoken in English with a heavy Austrian accent)


Poor Grogman's picture

Tax QE, tax the Fed

It's for the children!

NoDebt's picture

In other words, we know you are going to come up short of the runway.  Please don't take that as our desire to plunge the plane immediately into the ocean.  There's still the vain hope you can just shave off the landing gear, bring it in on it's belly and maybe salvage a few survivors.

Sum Ting Wong

We too Lo

Ho Lee Fuk

Welcome to America.  Please watch as you unload the overhead compartments as the contents may have shifted during flight.

lolmao500's picture

China warns Japan over reported plan to shoot down drones

China warned Japan on Tuesday against "playing up" tension after Tokyo reportedly approved a plan to intercept and shoot down any foreign drones if they ignore warnings to leave Japanese airspace.

China's foreign ministry spokeswoman Hua Chunying made the remarks in response to a report by Japan's Kyodo news agency on Sunday, which cited a "source close to the government," that Japanese Prime Minister Shinzo Abe approved the plan.

If confirmed, the move would signal Tokyo's readiness to unilaterally respond to an increasingly acrimonious territorial dispute with Beijing over a set of islands, known as Diaoyu in China and Senkaku in Japan. Last month, a Chinese military drone was reportedly spotted near Okinawa.

Here we go...

NoDebt's picture

As a distraction from our own very considerable problems.... We'll take it.

max2205's picture

Everyone should know thag we dont have ANY control anymore. ...our economy is now at the mercy of brown and yellow people who don't speak English

Bangin7GramRocks's picture

Oohhh! I'm soooo scared! Reading this was like listening to a pimple faded 16 year old explain the awful minutiae of his retail job. Bernanke would've flooded the world with trillions of dollars and the "crisis" would be over before it began. End of story!

NoDebt's picture

Well, that is certainly the plan from here out.  If it moves, print at it.

moneybots's picture

"The danger WAS very real, as a default by the US on its debt obligations would have gone to the very heart of the "plumbing" that underlies financial markets"


There really wasn't any danger, as the event was theater.

Number one, not raising the debt ceiling does not cause default.  With all the staged concern about the effects of default, had the debt ceiliing not been raised, you can bet that the debts would have been paid, at the expence of government promises, which are just that, promises.

As it was, the day before the stated deadline, congress suddenly had a love fest and raised the ceiling, demonstrating the whole event was nothing more than theater.  There never was a danger of default.

NoDebt's picture

I agree.  the real "oops" won't come where we are looking for it.  Somewhere, deep in the system, something will quietly break some random Tuesday night (perhaps tonight).  In a couple days the effects will ripple out and once again, we'll be in panic mode.  Minus all the monetary ammunition that was expended during the previous crisis.


PeaceMonger's picture

Fuck You Bernanke!!

Cognitive Dissonance's picture

If an empire defaults on its debt and no one believes it actually occurred did it really happen?

<What exactly is severely understated inflation, but just a default by another name?>

NoDebt's picture

I believe they call it 'recovery' nowadays.  THEIR recovery.  Not yours and mine.

RECISION's picture

Haha, very good.

I would have given you more up-arrows if I could've.

knukles's picture

In simple Schrodinger terms, yes, no and maybe
Where's the pony?

The Empire State's biggest entity defaulted and they called it a "Moratorium."

Go figure.

Yellowhoard's picture

Again, interest on the debt is about 20 percent of monthly tax revenue.

Combined with a constitutional requirement to settle debt before all else, the only way that we would have defaulted on the debt would have been an impeachable decision to direct the treasury to no pay.

Sabibaby's picture

Just barely reading through it but holy crap I never thought about things this way...


Now, a mere five years on, we and ourselves in the position of requiring roughly three Bear Stearnsbailouts every month just to keep things humming

Reaper's picture

Moral or hazard have become archaic concepts for Ben, Janet, Barack or those in Congress. Eric Holder has declared his pigs are more equal than others. A new mathematics without limits is their new fiat.

tradewithdave's picture

Moral hazard requires Adam Smith's invisible hand.  The invisible hand requires participants have a moral compass, a conscious and a general requirement of honor amongst counterparties all while upholding the rule of law with no concern for "ripple effects".  In the absence of a Judeo-Christian ethic such a system no longer functions.  It simply gets gamed to the extent participants who believe that it IS a free market are sheared like sheep by those who know better.  How do the "systemically important" manage to sleep at night?  When the goal is to lay up riches in the here and now, who has time for sleep?  Sleeping is for the Mike Mayos of the world.  Stealing money and merely paying fines is the path to the corner suite and empowers CEO's to make claims such as "that's why I'm  richer than you" and "doing God's work" as if God needs help from a bank and as if money could actually make someone truly rich.  If true riches were that easy, then printing an unlimited supply of money would actually work. 

NoDebt's picture

"How do the "systemically important" manage to sleep at night?"

They sleep very well, thank you.  On silk sheets, knowing they are doing God's Work.  Just ask them.

We traded in any pretense of the invisible hand for the Very Visible Hand at least 5 years ago.  They know better than God, anyway.

oddjob's picture

if a God had a blog would he allow comments?

Teddy Tenpole's picture



Hopefully he would prescreen for really stupid ones.

StandardDeviant's picture

I believe that's called "natural selection."

Disenchanted's picture

Which God...Baal, Moloch, Ra, Mammon?

monad's picture

Moral hazard simply requires one person to act on their belief that they know what is best for another person. Once this line is crossed its just a matter of time.

Disenchanted's picture

re: "In the absence of a Judeo-Christian ethic such a system no longer functions."

In economics/finance/money we're now operating on Judeo only ethics. Which are situational ethics.


How's that working out for us who are on the wrong side of the situation?


"...doing G_d's work"

janus's picture

i'm gonna go out on a limb and do something very unjanus-like.  yes, staying on topic is not what i'm known for; and, not that i expect anyone's pity or understanding, but it's altogether uncomfortable for me...not chasing down tangents and all. i demand forgiveness.

before i reveal what's relevant and whatnot, i thought it meet to mention something that needs mentioning: jim grant is a superlative writer.  one pauses before one shares such enthusiasm; presuming one has, at some point prior, said something to such effect...but just in case i haven't (and it nevertheless bears repeating), i wanted to make sure my opinion on matters was duly entered in the record.  just to recap:  jim grant, all aces with the poignant prose and perspecacious phrases.   gold star from janus.

on to the on-topic bric-a-brac:

believe it or not, driving a cab in boston's evah-so tony metro-west is one of the best settings for lecturing the world's movers and shakers in every manner imaginable -- especially their respective fortes.  i have, for example, ferried former and current fed employees from place to place (one of which took me all the way to greenwich, ct...600 dollar fare and 300 dollar tip (nice)...the guy was a mad genius...almost hit me with a novelty oaken paddle he'd stolen in course of some zany hi-jink or other -- i need to get back in touch with that guy (he's going in the book)).

now, shortly before my move to boston, i'd cooked down a cauldron of fact & fiction, trial & error, truth & lies, right & wrong, good & bad...the works!  and once this colloid of irreconcileables had thus condensed to something more managable, i transferred it to my crucible; wherein i fired it furiously till nothing remained save for that solid and elemental thing i always carry with me...let's call it the ring of power -- My Precious.  as you can see, my authority and swagger has all the trappings of legitimacy -- a foundational footing from which i can securely stomp the heads of evildoers.

and if there were ever a crew of evildoers that were collectively beggin for a solid stompin, it's banksters.  i think we can all agree that i've done more than enough to establish my rights and prerogatives viz. banksters, their graft (oops, i mean 'craft) and what punishment fits its unremitted crime...again, on that much we can all agree.  but a difficulty invariably arises whence janus skips ahead to questions like:  would you prefer a fema camp or exile in the gobi desert?; how do you feel about enhanced interrogation?; do you favor orange or fuchia when it comes to prison jumpsuits?  banksters bristle at such questions...especially when delivered by cab drivers with a decidedly southern drawl.  who knew?

anyway, as i was reading through (slowly, mind ya) 'things that make you go mmmm?' i was reminded of a conversation i often have with these fellas (usually good guys, one and all -- if you can overlook the rank criminality of their industry, that is).  in order to demonstrate my open-mindedness, and in a deferential effort to give them the positional benefit in the argument (they being representatives of the sham), i will often concede (falsely, mind you) that fiat is the way to go...that it represents the most effecacious means for multiplying wealth within a given economy.  okay, i say, why then the peculiar institution of a federal reserve bank, privately owned?  

they uniformally respond with the hackneyed trope about independence...yadda-yadda-yadda.  and then, when i soundly (and authoritatively) remind them that the fed has been the most blatantly political appendage within the american body-politic there has ever been.  that politics is the dominate theme in fed decision making; they never fail to demonstrate this at times of particular political crisis; and though this confounds thier initial positoin, they (the bankers in the back of my cab) always end up on that point agreeing.

but this political question isn't one of ideology; which means it's an issue unfamiliar to the american voter.  this is a question of 'real' politics; it translates in the english tongue to 'power''s what's going on when you weren't looking.  but back to this in a moment.

after mr. banker and janus are agreed that the fed is anything but independent, we move on to the issue of inflation, and the orthodoxy of the fed in ever maintaining it.  without belaboring the tedious specifcs involved in demonstrating that an inflationary impetus is of profound benefit to the banking industry and has an unambiguously corrosive impact on the fortunes of america's working and middle classes, i'll move ahead to my concluding point.  you're all HedgerZ, you do the math.

you think politics has anything to do with republicans or democrats?  fuck off.  there are, in point of fact, two parties within this country -- Us & Them.  gore vidal called Them the War Party; he was gracious in generous in so calling.  i have another name for them -- Brood of Vipers.  

and that's what it's all about; a corporate, oligarchical megalyth meant to menace your every waking entity that scrutinizes your every movement so that maximum return can be extracted from your activities; a sinister force that seeks to cast your identity into a mold of their making; a putrifaction of lies and deceit is every day fermented for to better distract you; and you vote for their ambassaors, who ply you with the politics of divisiveness and plunder your superstitions.  

for you see, the federal reserve must be a privately held corp.; inasmuch as the fed and its surrogate banks and interdependent corps are in all actuality the vital organs of our zombie government...moreso than capital hill itself.  look, just because they stage their pantomime in various playhouses up and down pennsylvania avenue doesn't mean anything meaningful is going on there. but as far as analogies go, the fed is like the executive branch of the War Party...primary dealers are corps are like the judiciary -- or something like that.  actually, nothing like that -- there are no checks on power...such is antithetical to the oligarchical.

my point is, this clap-trap might'a played way back in the early to mid 20th century...but it's just so goddam overt...what, with the internet and all, We the People are, at long last, startin to catch on.  

so again i ask the question: orange or fuschia...





anonnn's picture

Keep calm Swindle on.

..."if there were ever a crew of evildoers that were collectively beggin for a solid stompin, it's banksters."

Not so fast, perspicacious one. The evil-bankster syndrome does have a long and real history and facts behind it. So it is not without justification that it impinges with the spear of truth. To wit: theobvious and terrible effects of the swindle.

BUT, the banker is, and always was, a syndrome entirely dependant on the LAWYER clan who  cleared  the path for both the banker and the bankster.

I.e., the LAWYER syndrome enabled the banker syndrome, the latter being impotent and toothless without the fangs of former. Yea, bankers may be profitably viewed as mere spawn and useful tools to divert attention from the source of the swindle.

How easy to spot the man behind the curtain...put there to to make invisible the putter.  Rockefeller, Morgan , et al were/are enabled to perform service to  faceless masters.

janus's picture

true, but you forgot about father was of their fold; and he once told young janus that lawyers are punks -- only there to run interference -- the 'real' crooks are (and will long remain) the eggheads overlaying spreadsheets.

that's why i call it Us vs. many euphemisms for evil -- banksters, politicians, accountants, etc.  we're gonna have to fight em all.

and we're gonna win.

back and forth through my mind/

like a cigarette,


Disenchanted's picture

janus, which direction are you looking today?

janus's picture

towards the future -- always and unwaveringly so.

but i think i know what you're driving's an ancient method -- folks need a reason to hate before they can love with any measure of authenticity.  the people (whether they recognize this or not) like to have thier emotions cycled through the entire spectrum of affection.  i won't elaborate anymore; as i'd hate for others to think i were structuring some kinda over-the-horizon master-plan.  nothing of the sort.

i'm just tossed to and fro, ever oscillating through the flow and flux of human experience...simply evaluating the flotsam and jetsam that brushes up against me.  sometimes it's glorious; more often than not, it's ghastly.

no plans; just a grand vision.

we all wanna change the world,



RaceToTheBottom's picture

Once you give into the Free Shit Companies (FSC), it becomes very hard to say no to the Free Shit Army (FSA)

RECISION's picture

I believe it is more - give-in to, rather than give in-to.

~ Grammar Nazi.

Otherwise... good point.

RaceToTheBottom's picture

The weird thing is that once you reply, I cannot correct my syntax transgressions...

RECISION's picture

Hate it when that happens...

d edwards's picture

In order for there to be a "moral hazard" don't you to have "morals" in the first place?

bluskyes's picture

Bah! Amerika was never in danger of defaulting. They still bring in enough taxes to make their payments.

A severely underfunded government would be a good step towards the cause of liberty