San Juan Mountains

San Juan Mountains
San Juan Mountains: Grenadier Range

Thursday, January 7, 2016

"The Big Short" Falls Short

"The Big Short" is a movie currently playing in theaters around the country.  According to Internet Movie Database the movie is about "four denizens of the world of high-finance (who) predict the credit and housing bubble collapse of the mid-2000s, and decide to take on the big banks for their greed and lack of foresight."  The movie is rated 8.1 out of 10.0 and described as "a true story."  A lot of people are watching this movie and a lot of people are getting a very inaccurate impression of what actually happened back in 2008.  I find myself compelled to revisit the issue of the Great Recession today because people who should know better continue to blame the wrong characters for what happened while, at the same time, they give the true culprits for the collapse a free pass.
I have not and will not go to see The Big Short.  I have several reasons for not wanting to see it.  Its graphic depictions of sexual immorality on the part of the stars of the movie is just Hollywood doing what Hollywood always does, glamorizing profligacy.  I have no need to see how immoral men can be.  Sexual immorality aside, my primary reason for not going to see the movie is the fact that it is nothing more than another anti-business propaganda film.  How can I say this when I have not seen it?  I dedicated some time to reading reviews of the movie that went into great detail about its content.  After reading reviews from various sources I think I have a pretty good idea what is being portrayed and I think I have a pretty good idea about how to criticize the garbage that is put up on the screen in this disgusting film.
The movie centers around four characters, all of whom have decided that the housing market in the Socialist Democracy of Amerika is headed for a crash.  For those of you who do not recall the heady days in the housing market in 2007, I will remind you that an investment vehicle known as a "mortgage backed" security was all the rage.  Mortgage backed securities were investments made up of pools of mortgages that were independently sold as separate investments.  They were divided into various tranches, depending upon the amount of risk associated with each pool.  Over time so many of these investments were created and repacked it got to the point where nobody really knew what was in them.  Then, when the housing market collapsed, the housing investments behind the mortgage backed securities no longer had sufficient value to support the value of the securities and everything collapsed almost overnight.
"Shorting" is a technique whereby an investor borrows a security from someone else and immediately sells it.  The expectation of an investor who shorts is that the investment will decrease in value.  If the investor is correct he will repurchase the investment after its decrease in value and pocket the difference as his profit.  Those who short are often blamed when the stock market goes down since their selling of stocks during times of market collapse is incorrectly deemed to be causal of the collapse itself.  Never mentioned is how often those who short end up being wrong and have to "cover their shorts" by buying securities back at higher prices, thus losing their money. Shorting is neither good nor bad.  It is simply an investment technique.
"The Big Short" shows how four investors used shorting to allegedly punish greedy and immoral bankers who were creating and selling mortgage backed securities to an unsuspecting public.  The villains in the movie are investment bankers, as they always are.  The villains in the movie are operating in a market free of government regulation, as they always do.  The villains in the movie are making enormous profits, as they always realize as a result of their immoral capitalistic ways.  The villains in the movie get their comeuppance when these four virtuous investors come in and short the mortgage backed securities they have for sale. The shorters then gleefully watch the mortgage backed securities fall to nothing in value as the mortgage market collapses.  Meanwhile the investment bankers either go bankrupt, run to the government for bailouts, or attempt to deal with their losses the best they can.
In this previous blog post I quote the author of Financial Fiasco as he describes what really took place during the start of the Great Recession.  The title of that post is "Government Caused the Great Recession" and it would be worth reviewing if you don't recall what I argued there.  I wrote other posts to this blog that described what really happened in 2008.  They can be found here, here and here. As I wrote in this blog post, "The Great Recession was caused by government policies encouraging home ownership and the extension of mortgages to people who would never be able to pay them back.  Those sub-prime mortgages were packaged together into securities that were then sold as high quality mortgage backed securities.  Government approved ratings agencies told potential investors they were high grade investments because they were backed by other government agencies like Fannie Mae and Freddie Mac.  A real estate bubble was created by the policies of the federal government.  When the bubble burst it was inevitable that somebody would be forced to take the blame.  Government deftly shifted blame from itself to the evil bankers who allegedly created the entire mess because of their inherent greed and avarice.  The mortgage market collapsed, the housing market collapsed and the stock market dropped by 45% from 9-1-08 to 3-9-09, the low point for the market. To illustrate how absurd conditions had become, at the low point of the stock market it was the case that dozens of S & P 500 companies had market valuations that were less than their cash on hand.   Most of the drop in the stock market can be attributed to the fact that politicians (Bush, Obama, Pelosi, Boehner) worked together with bureaucrats (Geithner, Bernanke, Paulson) to convince the citizens of the SDA that without hundreds of billions of dollars of new money injected into the economy there would be a total cessation of all economic activity in a matter of days.  Of course they were wrong.  I also suspect they were lying.  At the very best there were some who were lying and others who were so brazenly ignorant of economics that they were incapable of perceiving the lies they were being told.  Nevertheless, we were all played for fools as the feds created $1.2 trillion in new money in a matter of months.  That money was spread around to favorite groups, in exchange for future votes.  We, of course, have been stuck with the bill.  We are now being told we need to make sacrifices in order to pick up the bill our leaders created for us.  Throughout the entire time period politicians were the center of attention, and they loved it."
The trigger that sent the economy into a tailspin was the application of the accounting principle known as "mark to market."  Investment bankers had protested that the application of that simple accounting principle could bring great harm upon the economy but government accountants and career bureaucrats refused to hear their arguments.  Mark to market requires holders of various investment securities to value their investments at the current market price rather than the book price.  Sometimes this principle makes sense but other times it does not.  When holders of mortgage backed securities were forced to mark the value of their securities to the market price and when the market price was incalculable (as it was in 2008), it brought about the state of affairs in which the entire mortgage backed securities market was valued at zero and deemed insolvent.  That, of course, was not true.  There were plenty of performing mortgages in the economy and all that was needed was a little time to sort things out.  Rather than giving the free market time to value the investments properly, the Fed swept in, on the authorization of Congress, and basically stole all of the allegedly worthless mortgage backed securities that were in the market.   The investment banks were paid pennies on the dollar for the investments they were forced to sell to the Fed.
Fast forward several years and we discover something that was totally ignored by the media.  As I wrote in this blog post, "An article from the Dow Jones Newswires published on August 25th told the largely ignored tale of the Fed's sale of the last of its shares of mortgage backed securities acquired from American International Group (AIG).  The headline stated, 'N.Y. Fed Had $6.6 Billion Profit on AIG Maiden Lane Sales.'  'Maiden Lane' is the Fed's name for its purchase of mortgage backed securities.  According to the article, 'The Federal Reserve Bank of New York on Thursday profitably closed the book on its crisis-era seizure of American International Group Inc.'s (AIG) most toxic assets, selling the last of the complex securities that have evolved from being Exhibit A of the financial crisis into one of the hottest buys around....the New York Fed announced a profit of about $6.6 billion...The New York Fed since April has been selling off about $47 billion in face value of complex mortgage assets from Maiden Lane III, which in late 2008 paid about 47 cents on the dollar...'  Several of the phrases in the above paragraph are very interesting.  Note that the purchase of the mortgage backed securities from AIG is described as a 'seizure.'  AIG was not permitted to sell their mortgage backed securities to anyone other than the government.  Hence, the best word to describe the Fed's purchase of the securities is 'seizure.'  Also note that those 'toxic' assets have turned into 'one of the hottest buys around.'  Now, how can it be that investment securities considered so dangerous by the US government and the Federal reserve that they had to be described as 'toxic' can actually end up being one of the best investments of the past several years?  Could it be that the mortgage backed securities were never toxic in the first place?  Could it be that the Fed, Treasury and other ministers of propaganda in the federal government had a vested interest in lying about the nature of the securities so they could ride to the rescue and effectively nationalize an entire company?  Could it be that the various branches of government were being less than totally honest with the American people on this one?  May it never be!  The Federal Reserve Bank of New York was able to purchase mortgage backed securities for less than half of their original value.  We were told at the time that the Fed's purchase was bound to result in taxpayer losses because the securities were essentially worthless and that the Fed was doing this simply to keep AIG from going bankrupt.  All trading in the securities was halted and there was no free market mechanism that could properly value the shares.  We were basically left at the whim of the federal government and asked to trust them.  I specifically remember hearing that AIG was 'dead in the water' and would soon go out of existence.  Now it turns out that the Fed essentially robbed AIG of its mortgage backed securities.  A couple of years later and the Fed is magnanimously agreeing to sell those securities at an extreme profit.  A couple of years later and those 'toxic' assets look pretty good to a lot of people.  So we have to ask, was the Fed just stupid or were Fed officials lying to us?  Either way, all of those associated with the Fed who were involved in the purchase of the mortgage backed securities should be indicted for securities fraud."
That is the story that Hollywood should be telling.  It is a tale of government greed, corruption, theft, lying and abuse.  It is tale that tells the truth about the Fed.  It is a tale that shows how profit seeking investment banks were seriously abused by career politicians and bureaucrats and then forced to take the blame for the economic collapse created by their government tormentors.  But that is a tale that will never be told in this free-market despising country.  We are all worshipers of government and no movie will ever be made that shows our hatred for profit seeking corporations to be misplaced and worship of government to be idolatrous. 

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