Moral Hazard The reputations of many large financial institutions have been tarnished as a result of the recent financial downturn. Although Wall Street has been associated with tremendous wealth and greed for decades, it seems that some groups in society have taken a personal hatred towards financial institutions; instead of adding value to society, these people believe that Wall Street has taken advantage of individuals and have corruptly taken the country’s money. A large cause of this negative connotation is related to moral hazard, where executives are involved with malicious business practices in hopes of earning quick money. According to an online financial dictionary, moral hazard is defined as “the risk that a party to a transaction or activity is not acting in good faith, or that one party has perverse incentives to act in a manner detrimental to the counter party”. Moral hazard is usually an intentional action where one party is aware that the action may not be in good faith. However, not all immoral actions are illegal. Some actions can be legally defended but are clearly not in the interest of the other party. For example, we learned that an employee in an asset management arm of a bank is technically a fiduciary, and therefore he is obligated to act in the interest of his clients as stated in his contract. However, a trader in the Sales in Trading division of the bank has a different relationship with his clients and can assume that the other party is knowledgeable about the product being traded. The structure of the financial system fosters an environment for moral hazard to exist. For example, the compensation structure of many employees creates an environment where people are incentivized to use malicious tactics in their favor. In many positions, a large part of you compensation comes from a year-end bonus that is often a direct