The National Catholic Review
An economist's take on HBOs 'Too Big to Fail'
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I am an economist, not a film critic, so I will not say much about HBO’s “Too Big to Fail” as an example of film making. My reviewing process: I watched the film with my wife and we then discussed it.

The film is a cross between a mystery drama and a documentary. HBO went all out and cast big-name stars: William Hurt stars as Treasury Secretary Paulson, Ed Asner as Warren Buffet, Billy Crudup as New York Federal Reserve President Timothy Geithner, Paul Giamatti as Chairman of the Federal Reserve Ben Bernanke, Kathy Baker as Paulson's wife, Wendy, and one of my favorite actors, James Woods, as Richard Fuld, chairman and CEO of Lehman Brothers, whose filing for bankruptcy in September 2008 set off shockwaves of fear that the entire financial system was about to implode.

To emphasize the film as a drama the producers focus on Secretary Paulson and his personal interaction with the other characters—Bernanke, Geithner, assorted bank presidents and other financial movers and shakers. The film's perspective is that the financial sector caused the crisis and then was called upon to fix it. They did, but at a high cost. The collapse into a full-scale depression was avoided, but the banks got even bigger through forced mergers; later, the banks sat on the capital infused by the government, and executive bonuses returned to their pre-crisis level.

As a viewer I enjoyed the film, and the dramatization brought the crisis to life. My wife and I both think that unless you already know quite a bit about financial operations you will get lost in the complicated events and obscure terms and perhaps not understand what caused the crisis and how the various players went about containing it. At one point in the film, a public statement needs to be made and after one aid spouts out a jargon-filled explanation of the looming crisis another yells "It’s got to be in English."

I am not sure whether the filmmakers have got all the details correct. I am not an expert on the inner workings of the financial system or of what went on in the Secretary of the Treasury's office at that time. However, it "feels" right. In other words, yes, this is how it could have played out.

Let me share some reflections and reactions on watching the film twice.

1. The focus is on Wall Street and the financial crisis created by its rash risk-taking. Little to nothing is said about the real victims of their manipulations—the millions who became unemployed as a result and the millions who have lost or are about to lose their homes to foreclosure. This is like a movie about slavery that focuses on debates between slave owners and abolitionists while omitting the cruelties slave-owners visited upon their slaves.

2. There is a chilling scene near the end of the movie. The Secretary of the Treasury calls a meeting with CEOs of the nine largest banks. The only other persons present are Geithner, Bernanke and Sheila Bair, the director of FDIC. These nine banks hold the fate of the United States economy in their hands. Their arms are twisted to save the day by accepting $125 billion in capital from the federal government infusions (via the government buying non-voting preferred stock from the banks), which they are to then lend to both personal and business customers, thus breaking the credit freeze that had resulted from the crisis. The banks resist until Bernanke says "If the financial system collapses, it will take every one of you down."

After the banks have agreed, Michele Davis, Assistant Secretary of the Treasury for Public Affairs, tells Paulson that some restrictions should be placed on how the banks can spend the $125 billion. Paulson responds by saying that if we put restrictions on them they won’t take it, and then strides off. Davis mutters, shaking her head: "They almost bring down the entire economy and they won't take it?"

What flashed through my mind was the popular image of a free-market economy driven and self-regulated by many small buyers and sellers. Here in this room sat these movers and shakers, not many, not thousands, but nine. The question we need to ask is: How did we get to a point where so few control so much, not only of the country's wealth but of our very lives? The HBO Web site for the film says: "In 2008, the fate of the world's economy was decided in a matter of weeks."

3. Trust is key for markets to function well and that is doubly true of financial markets. But trust is easier to come by if there are clear rules and regulations about how actors may operate. At the beginning of “Too Big,” film clips are played from Presidents Reagan and Clinton speaking about the importance of deregulating the financial sector including dissolving the wall between commercial and investment banking. It is this very deregulation that paved the way for the risk taking activities that violated every canon of trust. Banks bought and sold securities on behalf of customers and for themselves, setting up conflicts of interest; rating agencies gave high ratings to derivative bonds without knowing or caring that they were filled with junk mortgages; and on and on.

4. The film ends shortly after the meeting with the nine banks. Bernanke and Paulson are in a room together and Bernanke asks, referring to the $125 capital infusion: "They will lend it out won't they?" Paulson quickly replies: "Of course they will!" He then slowly turns and looks out the window and more quietly says again: "Of course they will." The film ends with a series of statements appearing on the screen:

Following the passage of TARP, banks made fewer loans and markets continued to tumble.

Unemployment rose to over 10 percent and millions of families lost their homes to foreclosure.

In 2009 panicked markets stabilized and the slide into a global depression was averted.

The biggest banks repaid their TARP money.

In 2010, compensation on Wall Street rose to a record $135 billion.

Ten banks now hold 77 percent of all US bank assets.

They have been declared to be too big to fail.


'Too Big To Fail' airs on Tuesday May 23 on HBO.

Charles K. Wilber is emeritus professor of economics and a fellow at the Kroc Institute for International Peace Studies at the University of Notre Dame in South Bend, Ind.

Comments

Christopher Mulcahy | 5/26/2011 - 8:31pm
What a brilliant commentary by Ronald Ruais!

I can only applaud his inspired observations and underline his identification of-and I mean this personally and directly-the two individuals most responsible for the nation's financial catastrophe, namely Barney Frank and Chris Dodd. These two, in the name of bogus points of liberal cant, but of course really of personal power, queered the central financial construct of the western world, i.e. the home mortgage. Centuries in the invention, and the key to family prosperity for millions, Barney and Chris were tragically empowered by us to substitute their own bathroom mirror judgment for the hard won product of our culture's wisdom. In a just world, the two of them should be hanged for the edification of all. And we voting adults should be suitably punished for empowering them. I guess we are.
Ronald Ruais | 5/25/2011 - 8:59pm
Demonizations of the wealthy, preferential treatment for the poor, the bible, revisionist history, feel good thinking
The National Catholic weekly magazine, America, this week ran an editorial titled “A Deficit of Trust – An economist's take on HBO’s 'Too Big to Fail' by Charles K. Wilber. Neither this article nor the HBO film shares the same recollection as I have of the 'financial crisis'. Moreover, c'est ennuyeux to read and hear over and over again the faulty logic derived from the “preferential treatment for the poor”. How, from this principle of Catholic social Justice can anyone conclude that “the wealthy are necessarily evil” is beyond me. The case in point is the expression “Wall Street”. The expression has been structured in such a manner that anyone associated with Wall Street are wealthy and therefore evil greedy people.
The history of the financial crisis is now being rewritten as an indictment of Wall Street because the poor have lost their homes through mortgage defaults. I reject this revisionist history. As I recall it, rather than Wall Street being the culprits in this financial episode it was congress. Specifically, Barney Frank and Chris Dodd share the bulk of the responsibility. Frank as chairman of the House Financial Services Committee and Dodd as chairman of the Senate Committee on Banking Housing and Urban Affairs, both of these men ignored warnings as far back as 2002. I have documented nineteen warnings that then President Bush issued to congress and the nation on the impending financial crisis, including two mentions in state of the union addresses. But these two liberals in their overly exuberant zeal to do the ‘feel’ good thing “every American should own a home” insisted that banks lend money to nonqualified persons. Does anyone recall the term sub-prime loan? The loan was not subprime rather this expression was a banking euphemism for the borrowers who were less than prime borrowers (subprime borrowers). (And yes I do recall ‘red lining’).
Wall Street, ever mindful of risk, packaged these subprime loans / mortgages into various derivative products. Many of these derivatives had the backing of Fannie and Freddie two pseudo government agencies (private banks acting on behalf of the government and Barney and Chris). When the bubble burst the derivatives had no buyers. Now, the government in its wisdom, defined ‘market value’ as “what a willing buyer is willing to pay a willing seller’. So with no buyers the value of the derivatives was 0 as in z e r o. With the resultant devaluation of the banks’ assets, they could no longer loan money. That is, our proportional banking system requires reserve assets in a ratio of 8 to 1. But now the banks had a shortage of assets given that their derivative product based assets were worth 0. But were they?
No they were not. The value of an option on an equity product is based on the price of its underlying. So had the government changed its definition of ‘market value’ for derivatives the banks’ assets would have been priced at some percentage of the mortgaged real estate that they were based upon? This would have unfrozen the credit freeze and avoided the necessity for TARP. Even at 50% of the value of the underlying real estate the banks’ assets would have been sufficient to continue to make ‘prime’ loans e.g. qualified borrowers.
But no! They chose instead to give away money borrowed from the citizenry. Look at the people involved in this decision, where were they from? Why did they let Goldman Sack’s number one competitor collapse but bail out a company that owed Goldman billions? That company (AIG) never received the bail out. They were a pass through. They received the billions and immediately passed it on to Goldman (within two weeks of receiving the citizens’ funds). I seem to recall, but I may be mistaken, that year Goldman’s bonus pool was one of its largest ever.
Yes for the most part Wall Street is driven solely by the profit motive and yes some are driven by greed. But let’s not condemn the lot for the sake of a large handful but smaller that a majority. And let’s not shift the blame from the administration to Wall Street. Yes Bush knew. Yes Bush warned (19 times). But Bush was president and could not get congress to change their ways. Thanks Chris. Thanks Barney. And thanks to Obama and Bush for listening to the Goldman connection in the White House.
The demonization of Wall Street will not and is not accomplishing the preferential treatment of the poor. The treatment of the poor is a matter of the head and the heart. It is a matter of the kingdom of God which we all know is within us and it is not in the body politic nor is it intended to be. If it were, Jesus would have established a worldly kingdom with no problem at all.
We are currently witnessing a cultural demonization of the wealthy. But this is anti-biblical. Consider Solomon, Job, Abraham and David, all wealthy men and some to an extreme for the times. Yet, God blessed them all. Consider these passages from Proverbs:
• “All hard work brings a profit, but mere talk leads only to poverty" (14:23).
• "Lazy hands make a man poor, but diligent hands bring wealth. He who gathers crops in the summer is a wise son, but he who sleeps during harvest is a disgraceful son" (10:4, 5).
• "One who is slack in his work is a close relative of one who destroys" (18:9).
• "Sluggards do not plow in season; so at harvest time they look but find nothing" (20:4).
• "The cravings of sluggards will be the death of them, because their hands refuse to work" (21:25).
• "A good man leaves an inheritance to his children's children" (13:22).
• "I went past the field of a sluggard, past the vineyard of someone who has no sense; thorns had come up everywhere, the ground was covered with weeds, and the stone wall was in ruins. I applied my heart to what I observed and learned a lesson from what I saw: A little sleep, a little slumber, a little folding of the hands to rest-and poverty will come on you like a thief and scarcity like an armed man" (24:30-34).
Consider 1 Timothy 5:8 “But if any do not provide for his own, and specially his own household, he has denied the faith, and is worse than an unbeliever". And 2 Thessalonians 3:10 “For even when we were with you, this we commanded you, If any will not work, neither let him eat.”
“In Luke 19 we read where Jesus tells a parable about three servants who were given charge over some money. In the story, Jesus says that two of the servants wisely invested the money while the third buried it in the ground. In His story, the one who simply buried it in the ground was called "lazy and wicked."” (“What the Bible says about money” by Lee Wilson)
In all this it is best to rely on Galatians 6:4 “But let each man prove his own work, and then shall he have his glorying in regard of himself alone, and not of his neighbor.” Interpreted as: “Pay careful attention to your own work, for then you will get the satisfaction of a job well done, and you won't need to compare yourself to anyone else.” (New Living Translation (©2007)
Mike Evans | 5/25/2011 - 3:20pm
Would have been nice to correlate this film expose with the academy award winning 'Inside Job.' Today the California Attorney General announced a wide-ranging investigation of the banking and mortgage meltdown with probably criminal and civil charges to follow. Mr Maher's comments look too much like the party line we all have heard but totally disbelieve. Read Paul Krugman in the NY Times as well as many other incisive comments from economists and consumer representatives. No wonder they hate the possibility of Elizabeth Steadman heading up the new Consumer Protection Agency. They (the banksters) are scared and so they should be.
Bob Brodie | 5/23/2011 - 5:38pm
For a citizen to comprehend the economic system there are a few basics we can keep in mind:

-Congress authorizes the printing of money
- issues it to the federal reserve who then sets rates to support themselves, then
- distributes it to national banks to set rates and support themselves.
- then loans the money to business people with a wide variety of rates for housing, autos,business projects, inventories and personal loans. Whatever the market will bear.

All to the unregulated and outrageous profit of the individual bankers.

Additionally, the banking industry uses their gains to issue bribes (Campaign donations) to their congressional champions.

Andrew Jackson dealt with the same problems with Mr Biddle and demolished the Bank of America

Banking is a corrupt industry.
A return to the separation of housing loans from speculative loans would be a good first step in correcting and stabilizing our economy .

Bob Brodie
Anchorage, AK
Tom Maher | 5/21/2011 - 12:00pm
Charles K. Wilber review uses the movie as a vehicle to promote his own decades-old political views on how society should be organized economically with plenty of governemnt involvment, control and direction.

Wilbur's gratuitous comments promotes his own constant political agenda that much more government control and direction of the economy is always needed. Government can be trusted to work for the common good and do what is right for the American economy. On the other hand, private bankers and business people are greedy and reckless and amoral and do not care what is good or right for the American economy. Private banks and enterprise can not be trusted Private enterprise therefore being evil has too much economic power which should be taken away and given to the benificent government that will more ablely control and direct our economy.

This is a 1930s view of how our economy should be structured, control and run. - more governemt. The more government you have the better the econmy will be. This is a disproven and dated view.

This view of more government is needed is esppecially dated in a global economy where trade, investment, fainacing and competion with foreign nations is essential to a countires economic healt and improvement.

The 1930s was needlessly restrictive of private enterprise wealth and control to no one's beneift.

Classically during the 20th century goverment control of the economy lead to the economic collapse of the SOviet Union.
As someone once noted goevernemnt is not the solution; governemnt is the problem.

It is amazing after so much failed experimentation worldwide of governemnt control of economies durint the 20th century that people still beleive government has some kind of magic power.

Wilgur fails to note fully the govenemnt role in the recent fiancial crisis. Governemnt regulators such a s the Federal Reserve did not recognize the housuing bubble and allowed the hosing bubble to continue until it burst. The hosing market was awash in money allowing housing prices to go sky high where no one could afford to buy a house. The housing market collpsed which in turn caused a mortgage loan collapse and then asystem-wide financial collapse.

There was no banking conspiracy. The governemnt and everyone though the economy was just fine until the hosuing market collapsed and massive trillion dollars worth of foreclosure started impacting the The U.S. fiancical system. By the way the same problem credit drive housing bubble and burst market happened in throughout Europe but even worse.

Wibur fails to recongize fully that the sudden severe fiancial collapses was cooperatively corrected within months. The 700 billion in TARP money loaned to the banks the governementr made a hugh profit on within months.

The contiued stagnation of the economy is due to failed governemnt economic policy. The governemnt directed trillion dollar stimulus program had no effect on the economy. The economy will not improve until government policy allows the private sector to profitably recover and expand and create more jobs. Just like every country does nowadays.

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