Movie Notes "Too Big To Fail"

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.