Prosecutorial Forbearance: Moral Hazard on Steroids ~ The Risk Averse Alert

Friday, August 03, 2012

Prosecutorial Forbearance: Moral Hazard on Steroids

Good garbage. Apparently, this week's central bank deluge fail — sure to accelerate decimation of credit markets straight to the trans-Atlantic banking system's core — was today's cause accommodating a short squeeze whose technical foundation was even poorer than last Friday's. Congratulations to trapped weak hands whose razor thin equity backs a mountain of insolvent debt. These rather obviously were behind today's squeeze, as already weak volume of shares exchanged on NYSE-listed issues since early June only weakened further.

Participation in today's short squeeze positively sucked. Absolutely no expansion from last Friday's already weak performance (see $NYHL and $BPNYA). In fact quite the contrary. By all accounts desire to own wildly overpriced paper at the bottom of the capital structure only continues to fade.

Of course, the living dead masquerading as "banks" have little choice but hang on for dear life to their huge piles of garbage otherwise called "assets," while at the same time exercising every "profitable" advantage no matter how untoward and downright criminal, that a still hopeless state of financial affairs somehow be managed for the sake of maintaining an illusion claiming the present period a "rough patch," rather than the face of evolving breakdown. This the result of prosecutorial forbearance is moral hazard on steroids. It will only get worse.

The greatest disconnect of our time — indeed, of all time — has been the utter lack of prosecution for securities fraud occurring within a shadow banking system pumping all manner of fraudulently constructed credit derivatives. The reason for this forbearance should be plain. Were fraud fueling the engine powering an historic debt trap prosecuted, the entire house of cards of ill-conceived securities, as well as every other asset whose value more or less lives at the luxury of these credit derivatives, would collapse.

Yet the negative financial effect of a debt trap built upon asset-stripped production capacities cannot be reversed in a climate where disinvestment in physical economy is institutionalized by insane obeisance to a non-existent "free market." Thus, too, you need not wonder why Team Fraud is constantly squealing for evermore lender of last resort largesse. Without this the true, insolvent state of the greater bulk of credit derivatives would be exposed. Likewise would be revelation of just how wildly overpriced is everything living at the luxury of this massive mountain of insolvent garbage.

Finally, it cannot be ignored that, today's giant debt trap lives at the pleasure of falling rates — a condition once propagated by the workings of a fraud-rife shadow banking system whose success pumping out AAA-rated credit derivatives (with no small measure of assistance from criminal ratings agencies) created liquidity necessary to sustain the bid on debt underlying the shadow banking system's historic Ponzi scheme. With lenders of last resort filling the liquidity void left by collapse of the shadow banking system's capacity to convert garbage into securitized gold, it is only a matter of time before confidence underlying every debt security straight to the trans-Atlantic banking system's core likewise is decimated. Blatant monetary inflation in an environment where the variety of AAA-rated securities is contracting (as has been the case since '08) will prove devastating, much as already has been occurring the past couple years throughout the euro-zone's periphery.

At the heart of the trap encircling every institution pretending to be a viable, solvent agency within today's badly compromised bastion of capitalism (more accurately called imperialism in its present form) is prosecutorial forbearance furthering moral hazard to a degree making blatant criminality (LIBOR collusion, drug trade facilitation, brokerage customer account pilfering, HFT trade platform hacking, etc.) acceptable business conduct necessary to sustain an otherwise hopelessly unsustainable arrangement doomed to collapse. Look no further than a U.S. Justice Department where "change you can believe" is delivered at the point of a gun provided Mexican drug cartels. Therein is the blind eye necessary to prop up the whole corrupt shebang. Why Congress in this climate is away from Washington this August might be explained simply concluding inaction is the very corruption for which representatives, indeed, are paid.

Fast Money
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