Moral Hazard And The Banking System

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Moral Hazard and the Banking System ACCT 6377: Corporate Governance Zachary Seay The University of Texas at Dallas Introduction The moral hazard of bank bailouts is a very simple idea enveloped in a very complex issue. Back in late 2007 to mid-2009 the United States and the global economy faced one of the worst recessions the world has ever seen. In fact the time period has been dubbed the Great Recession. Now at a broad level this recession was caused essentially by our large banks buying and positively rating thousands upon thousands of mortgage backed securities and collateralized debt obligations. In addition, the banks started getting to a point where they were leveraged sometimes in excess of 30 to 1. The Federal Reserve initially recommended banks try to stay around 10 to 1.(d) When the mortgages started to foreclose the value of those securities plummeted and the banks started to lose solvency. With the issue of possible banks going into bankruptcy the government of course got involved. Instead of letting the banks fail, taxpayers instead bought up many of those toxic securities along with toxic bank stock and set the banks free without so much as a slap on the wrist. This is what many have come to consider a moral hazard. It is hard to tell if our actions really even helped as the economy didn’t start getting to back to normal until around 2012. Mortgage backed Securities & Collateralized Debt Obligations Mortgage backed securities and collateralized debt
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