Too Big to Fail?


Over Spring break, in a fit of boredom and with quite frankly nothing else to do, I took the time to watch the movie The Big Short. And the reason why I bring up this film is not only because it stars some beloved/ well-known celebrities—Christian Bale, Steve Carrell and Ryan Gosling among others—but because it directly ties into the 2008 financial crisis that Inside Jobs addresses. For those of you who have yet to see it, I most certainly recommend it and I will give you a brief low-down of what it is all about (with avoidance of spoilers of course). The plot surrounds lead character Michael Burry, an eccentric hedge fund manager who determines that the housing market is built on high-risk, subprime loans hidden by Wall Street’s vast degrees of lies and manipulation. Upon the belief that the bubble will burst within the next few years, Burry bets against the housing market with his investors’ money and simultaneously reveals the corruption within the financial industry. This directly relates back to the documentary’s discussion on conflicting interests of credit rating agencies. Credit rating agencies rate these mortgage bonds and investors use these ratings when deciding whether or not to invest.

So, credit rating agencies arguably should act with the interest of investors and financial statement users in mind. But in reality, these credit rating agencies (Moody’s and Standard & Poor’s) were giving these junk bonds gold-plated AAA ratings. Why? Because, ironically enough, the firms to which Moody’s and Standard & Poor’s were rating were also the direct source of their revenues. Credit-rating agencies’ complicity to turn F-rated bonds into A-rated bonds further perpetuated the 2008 financial crisis. While the SEC passed new rules designed to limit these conflicts of interests amongst credit-rating agencies, this is the exact overlapping of dominance across spheres that Walzer seeks to avoid. Walzer states that complex equality is the opposite of tyranny—it sets up relationships in such a way that supremacy is impossible across spheres. For example, “Citizen X may be chosen over citizen Y for political office, and then the two of them will be unequal in the sphere of politics. But they will not be unequal generally so long as X’s office gives him no advantages over Y in any other sphere—superior medical care, access to better schools for his children, entrepreneurial opportunities, and so on”.

The power Wall Street obtained leading up to the financial crisis was very much not distributive. It is clear that inequality is seen by dominance of a firm in both the corporate sphere inflicting that dominance on the sphere of credit-rating agencies. It is this conflict of interest that relates back to Walzer’s discussion of inequality in economic dominance affecting political dominance, and so on. He states that by preventing power in one sphere from spilling over into other spheres will ensure that control over individuals in one sphere does not automatically mean control of individuals within another sphere. During the financial crisis, not only did banks have control over collateralized debt obligations, but they also had control over these credit-rating agencies compensation, and in turn were able to dominate/ manipulate investor decision-making.

For all you Ryan Gosling fans (I know you’re out there), here is a clip from The Big Short of the housing crisis explained in terms of Jenga:

 

 

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7 thoughts on “Too Big to Fail?

  1. Very accurately stated, Morgan, I agree that dominance played a large roll in convoluting the duty and obligations of the SEC, government, and regulating officials when the sphere of the market dominated the sphere of regulation. Additionally, I can see how the Distributive Principle of Free Exchange would further perpetuate the system of corruption of dominance for the social good. Also, love the “AAA” rating jenga parable clip, speaks volumes when coming from the Gosling.

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  2. Morgan, great post. I like how you centered your view around the Movie the Big Short. I think its something to be said that media plays a lot into how we view the world and global matters. Therefore creating a film about the financial crisis is something relevant to everyone. I like how you said “The power Wall Street obtained leading up to the financial crisis was very much not distributive. It is clear that inequality is seen by dominance of a firm in both the corporate sphere inflicting that dominance on the sphere of credit-rating agencies.” I think this is a good comment because it directs the question of who is to blame, because there was so much unequal distribution.

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  3. I agree that the movie is a must watch. If you don’t fully understand the crisis, the movie helps describe what happened with some humorous and eye opening examples. It’s important that we continue to talk about this years afterword because in my opinion what lead to the downturn was a culture of ignorance and greed on wall street with a lack of accountability or empathy for others. I am by no means anti capitalism or anti wall street, but there were clearly some horrendous moral and ethical actions that occurred during and before the financial crisis that need to be addressed and fixed for a more sound financial future.

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  4. Morgan, I really enjoyed your post about the unequal power between officials, government, and the SEC. I also watched the movie and found myself asking “why” more than I’d like to. I couldn’t wrap my head around the falsified credit ratings and the unwavering and destructive power of Wall Street. So many trusted institutions led investors and stakeholders through the largest financial crisis of our time, for what? I like how you tie in Walzer’s discussion of inequality and complex equality because I believe that relates nicely to the topic. Oh, and as @jacobisraelhannah mentioned, anything from “the Gosling” is ironclad.

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  5. Yeah, I need to see this. And I love jenga.

    Does the movie heroize the short-sellers who profited from the bubble? Just curious if it suggests that the only way out of such bubbles is through other market actors versus better regulation.

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