MOVIE NOTES: TOO BIG TO FAIL
This is a movie about
the financial crisis of 2008 brought on by the collapse of the housing market
and the failure of many Collateralized Debt Obligations and Mortgage Backed
Securites.
Two main points:
1)
No one
realized how intertwined all the big banks and insurance companies had
become. Basically, all the banks were
making high risk loans and INSURING THAT RISK AGAINST LOSSES by buying credit
default insurance. Then it turned out
that only ONE insurance company had insured ALL the banks against risk from
each other. So if one company went down,
they ALL would go down.
2)
Moral
Hazard: This term is used to describe
the danger of too much government interference in the economy in regards to
risky loans. The theory is that if the
Government keeps bailing out banks that made loans that were too risky, then
the rest of the banks will keep making riskier and riskier loans and the
Government will have to keep bailing all the banks out when they get into
trouble.
Think of it like
this: If you go to the casino, and you
loose all your money, including your rent, grocery money and the money to buy
the medicine for your seriously ill child who will die without it, NO ONE at
the casino is going to listen to your sob story about all your problems and
then give your money back. Because if
they did, then they would end up having to give EVERYONE’S money back.
The movie is basically
about the interplay between all the branches of our government as to how
economic policy is handled.
Key players:
The Federal Reserve
Bank: The bank of the US Government is
called the Federal Reserve Bank. There are 12 Federal Reserve Regional Banks,
with the New York bank being the most important. The head of the Fed is called the Chairman,
currently held by Janet Yellen. At the
time of the crisis, Ben Bernanke was the chairman of the Fed. He was a lifelong academic scholar who
studied the Great Depression, so he was uniquely qualified to deal with another
potential financial collapse.
The US Department of
Treasury: This is the department of the
government that controls the money and major economic decisions including bond
sales etc. At the time of the crisis, the Secretary of the Treasury was Hank Paulson, who was formerly the
chairman of Goldman Sachs, the largest and most profitable Wall Street
investment bank. Many of his key
staffers were also from Goldman.
Lehman Brothers: A big Wall Street trading and investment bank
that had been very successful and recently “gone public”, meaning that it had
sold shares of itself on the stock market and was owned by stockholders (the
public). Lehman had bought a lot of
those bad loans that we saw in The Big Short.
Dick Fuld was the chairman of Lehman Brothers at the time, and blew his
chances to save his firm.
