Commentary: Movies ‘Inside Job’ and ‘Too Big To Fail’ entertain but don’t explain the panic

From the editor:

The new financial-crisis movies “Inside Job” and “Too Big To Fail” are riveting tales of Wall Street and its giant banks, but don’t expect to find out why taxpayers were forced to bail out those big banks in 2008.

Each movie tells important pieces of the crisis of 2007-2008, but neither explains what was the panic that freaked out top U.S. officials and sent the Bush Administration to Congress, hat in hand, for $700 billion in September 2008.

The repurchase market, where the panic was centered, is not mentioned in either movie, though each movie does a fine job of explaining banking conditions leading up to and during the crisis.

It’s like telling a sick joke and then leaving off the punch line.

“Inside Job” shows that deregulated banks borrowed lots of money, paid themselves handsomely, financed a housing bubble, ripped off homeowners and investors, lost billions, and made taxpayers pick up the tab, all while regulators twiddled their thumbs. Watch the movie, and you can feel your blood pressure rise.

But I had to see the movie twice to find the spot where it tells what the crisis in the financial markets actually was.

Well into the movie, the narrator quickly summarizes in about two minutes by saying:  Home foreclosures skyrocketed, securitization imploded, mortgage lenders couldn’t sell their home loans to investment banks, the mortgage lenders failed, the market for collateralized debt obligations collapsed, investment banks couldn’t sell their loans or collateralized debt obligations to investors, and the investment banks ran out of cash.

This summary makes it sound like the crisis was caused by the first point, home foreclosures skyrocketed. But the dollar amount of home foreclosures was not large enough to cause a systemwide panic and credit freeze. Instead, the crisis was caused by the last point, the investment banks ran out of cash.  The chaos in 2008 occurred mainly because the repo lenders to the over-leveraged investment banks stopped financing them.

The 2008 financial crisis was not caused by homeowners who borrowed too much money. It was caused by big banks that borrowed too much money, especially on the repurchase market.

And little has changed, to prevent that from happening again.

“Too Big To Fail” is a blow-by-blow account of the scariest days of the crisis, with Treasury Secretary Hank Paulson as the hero, played by William Hurt, saving the financial markets against the worst possible odds.

Throughout the movie, the narrator hints at the problems in the repo market, without ever explaining them or mentioning the r-word (repo). There was “a run on the banks,” the narrator says a couple of times.  “Credit markets were frozen.” “Interbank lending stopped.” “We can’t finance our daily operations,” a General Electric* executive says.

Through conversation among Paulson’s staff, the movie gives viewers a fine explanation of credit default swaps, the cause of American International Group’s near-demise.

But the movie does not attempt a similar explanation of repo.

The best dissection of the crisis, in either movie, comes near the end of “Too Big To Fail,” when Federal Reserve Chairman Ben Bernanke, played by Paul Giamatti, soberly explains that what is destroying the economy is the disruption of credit, just like in the Great Depression.

The Great Depression in the 1930s was not caused by the stock market crash of 1929, and the Great Recession of the 2000s was not caused by the housing crash of 2008, Bernanke says. Both economic crises were caused by the disruption of credit.

We have to bail out the banks, to get credit flowing again, Bernanke says.

That’s as close as anyone in either movie gets to the r-word.

Mary Fricker
Editor, RepoWatch

*General Electric sold short-term unsecured commercial paper to help fund its operations. Money market funds were key buyers. When repo lenders forced the Lehman bankruptcy in September 2008, one money market fund’s shares lost value. That spooked investors who took their money out of money market funds, and in October General Electric could not find enough buyers for its paper, according to GE testimony before the Financial Crisis Inquiry Commission.