What happens when you see a movie and it only tells you half of the story?
The movie is “The Big Short.” I left the theater profoundly disturbed because as compelling as it was, the script never examines the root cause of the tragedy.
The movie is based on the book by the same name, and is about the levels of corruption and stupidity in the housing market that caused the world-crippling financial crisis of 2008. The movie is funny, fascinating, depressing and really well done. At its core, its about greed and the lengths people will go to make money.
The story follows different fund managers who stumble upon the great cracks forming in the housing market. The managers uncover layers and layers of corruption, stupidity and outright fraud that infected the housing market from top to bottom and the financing behind it. These managers set out to profit from the fraud by making outright bets that the housing market will collapse along with the banks that funded it.
The material is admittedly complicated. It attempts to delve into many arcane parts of the financial markets by the technique of brief “out talks” by celebrities. The script does a fantastic job of explaining what happened and making it all comprehensible to the average viewer. However after watching the movie, you leave with only a partial (small, really) understanding of the level of fraud that actually occurred. At its core, the movie leaves out the genesis of the crisis.
I know. I was there.
The movie, the narrative and popular wisdom all have the same back story: Wall Street and its greedy bankers caused the crisis. Politicians and the government came together in a crisis and fixed the flaws in the system so that this will never happen again. But contrary to that narrative and popular belief, it was the government and its edicts that were the prime reason why we had a housing crisis in the first place.
“The Big Short” should have started with The Community Reinvestment Act, a law passed in 1977. The law was created as a way to force banks to make more loans to the communities in which they did business. Many activists believed that banks cordoned off certain areas informally designated as “no loan zones” where they would not make loans because of the income levels and skin color of the prospective borrowers. The law was meant to these force banks to make loans in the areas in which they had a branch. So, if a bank had a branch in a poor area,the bank had to make a certain percentage of loans in that same area. Even if the bank knew there was a high probability of default, the bank was still obligated to make the loan.
The real story, and the bigger crime, is that once activists realized they could make money off this law, they started targeting banks to force them to pay them off. For example, an investment in Acorn or Jesse Jackson’s Rainbow Coalition could be written off by the bank as an investment in the minority community. Even Barack Obama got into the act by helping a client sue Citibank for turning her down for a loan for which she had applied.
But that wasn’t enough.
In the old days bank, banks who made the mortgages kept them on their books and recorded them as losses; but, when Fannie Mae and Freddie Mac got involved, at the urging of Congress, the housing market began to sky rocket. Once the banks realized that they could resell these problematic mortgages to government sponsored entities, they did so with vigor. Once the banks knew they were not on the hook for the bad mortgages, and could actually make money reselling them, they did the most logical thing: they made a lot more bad loans. Between 1998 and 2003, Fannie Mae’s loan book in subprime mortgages went from $1.2 billion to $81 billion.
Fannie Mae and Freddie Mac were, and are, Government Sponsored Entities (G.S.E). As such, they carry an implicit guarantee by the U.S. government. Thus they enjoy the same credit rating of the U.S government. Because of this fact, these two G.S.E.’s were able to package these loans and sell them to unsuspecting investors all over the world who wanted the safety and yields that their bonds offered. These investors had no idea that the loan pools they were investing in were loaded with toxic debt.
Without passage of The Community Reinvestment Act or the participation of Fannie Mae and Freddie Mac, the housing crisis would never have happened. Investors all over the world only flocked to these G.S.E bonds because they they were allegedly vetted and guaranteed by the U.S government.
The heart of the housing crisis is really the story of how radical activists and liberal politicians hijacked the U.S financial system to advance and promote their socialist agenda. While the the activists may have hoped to to do good by giving certain people a leg up and thereby enabling them to own a house these programs actually bankrupted the poorest members of society. The ones with so little to lose lost the most.
These “do-gooders” are not done.
The Student Loan Bubble (college degrees for all!) and the Green Technology movement can trace their roots to the same housing activists. They continue to believe that government action combined with capital can create the utopia to which they so desperately aspire. The activists were not content that some students did, in fact, have access to college degrees. They set their goal to be federalizing the student loan market. The result? 1) Recent graduates are burdened with debt they can likely never repay and, 2) they are over qualified for jobs that do not exist. In the green technology movement, federal tax laws and environmental activists are working together to browbeat energy companies and the automotive industry using the power of the state to compel carbon trading platforms along with the forced development of green technologies that at this point… are not profitable .
“The Big Short” is no longer in theaters. But don’t worry… you will soon be able to see the sequels: “The Student Loan Catastrophe” and “The Green Technology Implosion.”