Too Big To Fail: Part Of The Story

HBO Flick Fails To Mention Key Meltdown Culprits

I watched with great interest (several times) the new HBO movie, “Too Big To Fail.” After all, if it explains the reasons we now face the worst economy in American history, I figured the movie should be praised and recommended to everyone, including my clients who aspire to start a business or who have a leadership role in running a business.

I didn’t know what to expect from a network whose producers happily broadcast leftist Bill Maher’s periodic rants… but I should have expected exactly what “Too Big To Fail” delivered: part of the story, with some very key ingredients left out (or distorted). That’s just what you get when the progressives have overrun (and merged) the information and entertainment industries.

The key “explanation” of the financial meltdown comes about an hour into the movie, beginning with Topher Grace’s character literally saying “here’s how you explain it.” Four characters, including former treasury secretary Hank Paulson and three other Bush administration advisors, then proceed to lay out the story of the meltdown – or, at least, the story the movie’s producers want you to have.

In their version, it all started when Wall Street began to bundle home mortgages together and then sell slices of those bundles to investors. These mortgage-backed securities were highly profitable, so these Wall Street investment banks began demanding more mortage loans from lenders (banks and mortgage companies). Since the lenders had already made loans to all the credit-worthy borrowers out there, they had to start “bottom feeding” by reducing standards – the example given in the movie was that you used to need a 620 credit score and twenty percent down to buy a house, but now they’ll take 500 and no-money-down. The Average Joe, figuring the experts knew what they were doing, assumed he could afford the house if the lender was willing to write the mortgage, so he “reached for the American Dream” and bought the house. Meanwhile, the banks knew these “subprime” loans were risky (the movie’s character used a more colorful – and less repeatable – word than “subprime”), so they bought a sort of insurance against defaults on the loans. This insurance was known as a “credit default swap,” and one massive insurer (AIG) underwrote a huge percentage of those bad loans… betting housing prices would keep climbing. But then housing prices suddenly went the other direction… Average Joe’s “teaser rate” for his mortgage expired and left him with payments he couldn’t afford… Joe defaulted (en masse)… AIG failed… and every investment bank and lending institution subsequently fails. They all needed bailouts, and that’s where TARP (the Troubled Asset Relief Program) came from.

When one character asks “Paulson” what she should tell the media when they ask “why none of this was regulated,” the treasury secretary (who, as the real Paulson had, came to the job from his former role as a Wall Street investment banker) replied “Nobody wanted to. We were making too much money.”

That story is fine, as far as it goes. None of the facts are disputed. But what’s missing is the government’s role, along with that of other nefarious actors, in creating the conditions for the mess in the first place.

It didn’t all start with Wall Street selling mortgage-backed securities. What, did bankers in the ’90s and ’00s suddenly get greedy? No, greed has been around for a long time, and this meltdown did not result from a sudden lack of regulation. On the contrary, the Federal Reserve and the U.S. government actually encouraged the housing bubble, and practically regulated its meteoric inflation and eventual burst. You have to go back to the Carter Administration to find the roots of the problem. President Carter, and other liberals, discovered that poor people weren’t able to buy some things that rich people enjoyed, like houses. This, they thought, was unfair… so they took action to try to equalize everyone (read: redistribute wealth). First, they upped the amount of a bank depositor’s federal insurance (through the FDIC) from $40,000 to $100,000 to encourage banks to take more risk (after all, the bank’s investors wouldn’t have to pay for defaults, Uncle Sam would – up to $100,000 now). But that wasn’t enough… they also passed a dastardly law known as the Community Reinvestment Act. The CRA not only encouraged banks to reduce their standards, it incentivized them to do so. If Bank A decided to stay safe but its competitor, Bank B, took the government up on its incentive programs, Bank A would be at a fatal disadvantage in the marketplace. So everybody started to play. And mortgages, unique among loans, were backed by real estate (and by taxpayers through Fannie Mae and Freddie Mac)… so the steady increase in home prices for several decades worked to “hide” the underlying fatal flaws in the system.

Still, things weren’t evening out as quickly as the liberals wanted them to… so once they got another liberal president into the White House, they moved in 1997 to strengthen the CRA. Non-governmental groups also got involved: calling the perceived inequality in housing a racial issue, groups like ACORN began actually pressuring banks to make tons of subprime mortgage loans. The pressures ranged from veiled threats of boycotts of banks that didn’t play ball to outright threats of violence against bank executives, sometimes at their homes. So, sure, Wall Street greed played a role in the subprime mess… but the CRA served, over time, to unleash that greed by assuring investors that they would make money on the upside of the housing market, but that taxpayers would pick up the tab on any downside.

Alarm bells began to sound as early as 2006, when Bush administration officials (real ones, not the movie actors) called for hearings in Congress to explore the fatal flaws in the mortgage industry. That year, though, Bush’s party lost control of Congress, and the other party (whose financial committee leaders received hefty campaign contributions from Fannie and Freddie) simply used those hearings to continually brush away any concerns. Geniuses like Barnie Frank and Chris Dodd actually assured the public that there were absolutely no weaknesses in Fannie Mae, Freddie Mac, the mortgage industry, or the housing market in general. Maybe it was they who were making too much money.

I have always wondered why, when all of this was ready to tumble at any moment, the moment “chosen” by the media and others was the height of the 2008 election season. As soon as the spotlight began to shine on the industry, it crumbled, and America jumped on the “hope and change” bandwagon. Since then, though, the printing of money and runaway spending on “stimulus” and other follies has only deepened the economy’s woes, and experts say things are going to get much worse as soon as the fake props give way (which is inevitable). That’s why I advise my clients to protect themselves as much as they can by starting a business of their own, being cautious with their personal spending, and investing in non-paper investments like gold and silver.

You should watch the movie. But you won’t hear anything in those two hours about the FDIC, the Community Reinvestment Act, ACORN, the 2006 Congressional hearings, or my crazy theory about the “deliberate” timing of the actual crash. As with anything you see from the media or Hollywood (with few exceptions, such as “Atlas Shrugged”), be advised that you will only get the part of the story that the liberals want you to know.

by Michael D. Hume, M.S.

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