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Moral hazard associated with proprietary trading activity

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Prior to the 2010 Dodd-Frank Act, banks employed proprietary traders (aka Prop Traders) whose job was to invest the Bank's capital in various short-term trading strategies. Prop Traders often took large risks (using leverage) and were rewarded with yearly bonuses worth millions of dollars. Prop Trading was eventually disallowed by the 2010 Dodd-Frank Act.

Explain the moral hazard associated with such proprietary trading activity.

Reference no: EM132623132

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