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: