Thursday, August 11, 2011

Movie Review: Inside Job

The message of Inside Job, told through Matt Damon voiceovers, is that deregulation causes financial crises.

The movie blames Wall Street - which certainly had its share of crooks and incompetents -  but ignores little guys like mortgage brokers, subprime home buyers, appraisers, and cash-out HELOC borrowers who blew their illusory home equity in Vegas. It also ignores the systemic problems that prevent incentive alignment, like deposit insurance.

One of the insights in Panic is that cash-out refinancings, like a HELOC, entail greater moral hazard than new home purchases. The borrower and mortgage broker both want the appraisal to be as high as possible, and since the property doesn't actually trade, there is no buyer on the other side of the transaction to provide a countervailing market force to the valuation. They liken these mortgage credits, where homeowners are borrowing money because they cannot support their lifestyles with there incomes, to failing businesses. They note that businesses that cannot service debt out of operating income are junk credits and have very high default rates.

If I was going to pin the crisis on one thing it would be: moral hazard. I remember, well into the crash, people buying high yielding CDs in banks that were going to fail. Who cares? The FDIC made them whole. But it gave the bankers consequence-free money to gamble with on building condo towers.

Falky says it best: "'Predatory' lending is when a bank gives a loan to someone who can't afford it, and then has the gall to ask for their collateral after 500 days of non-payment."

Rating: 1/5

4 comments:

Stagflationary Mark said...

"If I was going to pin the crisis on one thing it would be: moral hazard. I remember, well into the crash, people buying high yielding CDs in banks that were going to fail. Who cares? The FDIC made them whole."

I was a participant. I moved some money to Washington Mutual so that I could enjoy their juicy 4% yields on checking accounts.

I pulled my money before things truly headed south, but I was a contributor to the southern flows. No doubt about it.

One day they had $100k of my money and the next they did not. Poof.

Eric said...

He should have added: Made loans to people who could not afford them (better, were traditionally poor credit risks) partly because the government strongarmed them into doing it.

Community Reinvestment Act

Of course being able to offload the risk via CDOs etc was a real comfort -- it made it all a lot easier.

Felix Hoenikker said...

Have you read "The Big Short"?

CP said...

http://www.creditbubblestocks.com/2010/04/review-of-big-short-inside-doomsday.html