Moral Hazard

Since: Jul 11

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#1 Mar 9, 2012
Before we get to the moral hazard piece, I have to mention rollover. Thursday is the first day of rollover, which is when the March ES futures contract changes (rolls) to June. We call it “top step” in the pit. In the past we would trade the new June contract on its first day (Thursday) but now we will wait until next Monday. The reason for the change is that volume will stay quite heavy in March until next Monday, which gives us the best chances for good trades.

CONTINUE TRADING MARCH UNTIL NEXT MONDAY.

The following is a response I gave to a question about our “moral hazard” comment that ends each of our emails. The gentleman that asked wanted my insight as a seasoned trader and financial commentator and not that of an egghead economist. You see, the man that asked is running for Congress and wanted a different point of view. Boy, did he get it.

Moral hazard is a term that describes how people/companies will take crazy risks that they would otherwise not undertake because they know they will not be held accountable if the crazy risk turns sour.

An excellent example is how Congress and the president of this country NEVER – EVER - put a banker in jail no matter what his crimes are. Oh sure, occasionally a patsy is sent to jail, but we all know that the bosses will NEVER go there. What's more, since they know that they will never go there and that the SEC never asks them to admit to guilt, they continue to commit crimes in their regular course of business to make that extra buck or two, or two million.

JP Morgan bankrupted Jefferson County Alabama with horrendously bad swap arrangements - committed bribery - was found guilty - and paid a fine. Jefferson County is BANKRUPT...and JPM paid a fine to the SEC. Officials of JPM even bribed the Mayor and the Mayor went to jail. Did the bankers that initiated the bribe go to jail? Of course not - they just paid a fine.

THIS IS MORAL HAZARD!

They know that even committing bribery to force, then secure, a ridiculously overpriced sewer project that even put the town into bankruptcy will NOT send them to jail. And since they know this, they will do it over & over & over again: Moral Hazard, indeed.

My specific comment at the end of each email pertains to the risk removed by Paul Kanjorski's committee that allows the bankers to get away with murder yet again - metaphorically. Congress forced the Financial Accounting Standards Board (FASB) to relax the accounting rules for the banking industry's real estate portfolio.

Before April 2nd 2009, banks had to mark the value of the real estate portfolio to the current value of the homes (mark-to-market). Prior to 2009, values were increasing and they were happy to "follow the rules." When the housing depression hit, they got off the hook again (remember, they had already been bailed out) when Kanjorski's committee forced FASB to remove this provision of GAAP accounting standards and allow bankers to use "mark-to-model" accounting standards. I like to call these new standards "mark-to-myth" or "make-it-up-as-you-go-alo ng" accounting.

This, of course, is a joke. Bankers can use an in-house "model" that they say will value a house in the future at X price, which is any price they want. Can you do that? Can you walk into a bank and ask for a loan...using your home as collateral that you know is 30% LESS than your purchase price? Mark-to-market accounting says today's market is 30% less than what you paid so you have no collateral in the home - and the banker throws you out of his office.

Once out of the banker’s office, which you bailed out in 2008, you realize that you didn't get a chance to explain so you walk back in.

When the banker controls his laughter, you are thrown out again. The bankers are not only above the law; they change the very law at their whim because the spineless clown-posse in Washington DC will do whatever they want, as soon as they are told.

Larry Levin
President & Founder - TradingAdvantage

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