Friday, December 18, 2015

"The Big Short" Tells The Real Story Of The Financial Crisis

The preferred story about the financial crisis is that the government caused the crisis.  Wall Street supporters, mostly Republicans, place the blame on two government sponsored agencies which were in the business of purchasing mortgages from originators and packaging them into securities that were sold to investors.  According to the preferred story, those agencies were pressured by the government to purchase mortgages from minorities who had poor credit.  The financial system collapsed when the sub prime borrowers failed to make their payments and destroyed the value of the securities they sold to investors.

Sometimes fiction is closer to the truth than the lies fabricated by influential people who tell the public the wrong story.  Paul Krugman believes that Hollywood comes closer to telling the truth about the financial crisis.  The Big Short is based a book by Michael Lewis which describes the culture on Wall Street which is mainly responsible for the financial crisis.  It is a story about how one hedge fund manager worked with Goldman Sachs to develop a mortgage backed security that was designed to decline in value.  He placed a winning bet in the market for mortgage backed securities that it would decline in value.  When the toxic security lost its value, naive investors lost their shirts, and he earned over $ 1 billion on his risk free short sale.

The Big Short is not the story that Wall Street banks, which packaged and sold more toxic securities than the government sponsored agencies, would like the public to understand.  They are now lobbying the Republican Congress to put the government sponsored agencies out of business so that they can take over the mortgage backed security market with the same incentives that led to their failure.  They are also lobbying Congress to weaken the Dodd/Frank bill that was passed into law in order to prevent the next financial crisis.  The effort to weaken Dodd/Frank began early.  Krugman reminds us that two of the members on the committee from a conservative think tank (American Enterprise Institute) conspired to write the law so that it would be easier for a Republican Congress to weaken the bill in the future.  The real criminals who produced the financial crisis are the Wall Street banks that violated their own underwriting standards so that they could package and sell mortgage backed securities to naive investors.  Three of the major Wall Street banks  ( Lehman Brothers, Bear Stearn's, Merrill Lynch) went bankrupt, or were merged with other banks because they were insolvent.  The Federal Reserve and the US Treasury rescued the other major banks which were less insolvent.  Most of the mortgage originators who fed the toxic securities to Wall Street are out of business.  The rating agencies who worked with the Wall Street banks to place high ratings on the securities that they packaged are still in business.  This was a criminal enterprise that brought the global financial system close to a collapse but none of the top executives of this enterprise faced a criminal prosecution.  Unfortunately,  one of our major political parties blame the government, and the poor families who were sold mortgages they could not afford, for the financial crisis.  Hopefully, The Big Shot will make it more difficult for Fox News and other captured media enterprises to sell their Big Lie. 

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