I watched “Too Big to Fail” (adopted from the book by Andrew Ross Sorkin) last nite on HBO. The film about the financial crisis was well done and gave, yet, another view of what happened and how.
My take away is what began as the government’s encouragement of home ownership to everyone ended with Wall Street running amok and selling mortgages to anyone because of money being made by repackaging and securitzing the mortgage debt. However, before the collapse, even Wall Street and banks world wide understood their risks and hedged by purchasing credit default swaps. They believed they were protected against the risks they took…and they were, except for the fact that only one insurer (AIG) was insuring against most of the defaults and couldn’t possibly cover the sheer numbers as housing started it’s tumble. (chicken or egg, here?)
One other point that didn’t come from this movie but from the book House of Cards by William Cohen is that the investment banks used to be partnerships, where the partners enjoyed the rewards and bore the risks. Now they are publicly owned and traded, and it creates an atmosphere where risk vs reward is more acceptable because the risk is greatly diluted yet the reward pays quite handsomely.