Brian Ghilliotti: Analysis of Documentary House of Cards

8/17/2019 Brian Ghilliotti: Analysis of Documentary House of Cards

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Brian Ghilliotti

Financial Literacy

May 8, 2016Documentary Analysis: House of ar!s

"he real#estate financial crisis of 2008 $as the result of %oor !ecisions an!

%olicies, %artially !ri&en 'y (ree!, from &arious mar)et actors that e&entually con&er(e!

into a systemic 'rea)!o$n of the financial system* "he actors that $ere i!entifie! in the

!ocumentary House of Cards $ho %laye! a role in this %rocess inclu!e! +all treet

in&estment interests, 'an)s in&ol&e! in len!in( mort(a(es, financial ratin( a(encies,

(o&ernment re(ulatory 'o!ies, refinance firms, an! 'orro$ers themsel&es*

Accor!in( to the !ocumentary, the financial crisis of 2008 $as initially lin)e! to

the terrorist attac)s of e%tem'er 11, 2001* "he -** Go&ernment, fearful that %eo%le

$oul! 'e hesitant to continue in&estin( in -** financial mar)ets after one of its ma.or

ner&e centers ha! 'een hit, !eci!e! to lo$er interest rates to near /ero an! ma)e

'orro$in( chea% as an incenti&e a(ainst fear* "hus the hairman of the Fe!eral eser&e,

Alan Greens%an, effecti&ely lai! the see! 'e! for the real#estate financial 'u''le*

"his $ell intentione! act $oul! set thin(s in motion that $oul! ha&e uninten!e!

ne(ati&e conseuences* Ban)s 'e(an to increase len!in( for mort(a(es, usin( lo$

interest rates as an incenti&e, an! e&entually eten!e! cre!it to %eo%le $ithout the

stron(est cre!it 'ac)(roun!s*

"his s%urne! a housin( 'oom, $hich in turn encoura(e! e&en more home

%urchases for home euity (ains as inflationary %ressure on home %rices (re$* Less

cautious 'an)s $ere $illin( to issue mort(a(es to home 'uyers $ithout stron( cre!it


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'ac)(roun!s on the %remise that home %rices $oul! continuously increase to le&els

'eyon! the &alue of the initial mort(a(e*

"hese tren!s attracte! the attention of +all treet s%eculators, $ho %laye! a

'i((er role in the real estate 'u''le %rocess* Ban)s $ho $ane! to (et ri! of less secure

loans $ere ea(er to sell these loans to +all treet s%eculation firms* 3nce sol!, they $ere

collecti&ely 'un!le! into financial %ro!ucts calle! mort(a(e 'ac)e! securities 4MB5,

$hich in turn $ere sol! to other s%eculators $ho thou(h these financial mechanisms

$oul! 'e continually sustaine! an! (ro$n from %eo%les stea!y streams of mort(a(e

%ayments*

Ban)s sellin( these less sta'le loans into mort(a(e 'ac)e! security %ro!ucts

effecti&ely transferre! their ris) onto +all treet* +all treet ha! &arious $ays to mana(e

this ris)* 3ne metho! $as to encoura(e the refinance in!ustry into esta'lishin(

refinancin( %ro(rams for %eo%les mort(a(es so they coul! )ee% the mort(a(e re&enue

streams (oin(*

"he i!ea 'ehin! refinancin( is to len(then the time reuire! to %ay off the

mort(a(e $ith smaller %ayments* "his in turn $oul! free u% %eo%les cash that $oul! 'e

other$ise use! for mort(a(e %ayments* +all treet ha! an interest in sustainin( the

refinancin( %rocess so %eo%le coul! stay in their homes an! )ee% homes off the mar)et*

"his $oul! )ee% home su%%lies ti(ht an! %rices inflate!, $hich $as a necessary 'ac)!ro%

to sustain ris)y loans an! securities that $ere lin)e! to them* "he refinance in!ustry (re$

e%onentially as a result*

+all treet also ha! an interest in ma)in( home %urchases more feasi'le for

%eo%le $ithout (ro$in( incomes in an en&ironment $here housin( %rices $ere un!er


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inflationary %ressure* "his s%a$ne! the (ro$th of he su'#%rime len!in( in!ustry* "he

most %o%ular %ro!uct of this in!ustry $as the a!.usta'le rate mort(a(e, $hich $as a hi(h

!ollar loan %ro!uct that offere! 'orro$ers lo$ intro!uctory rates that $oul! increase o&er

time* Many 'orro$ers sa$ these %ro!ucts as enticin(, an! thou(ht they coul! refinance

.ust 'efore interest rates $ere set to increase* Len!in( stan!ar!s $ere lo$, an! many

'an)s !i! not care since they %rofite! from fees an! coul! al$ays sell off ris) to +all

treet*

+all treet firms continue! to a'sor' more ris) to sustain the financial 'u''les

relate! to mort(a(e 'ac)e! securities, an! encoura(e! 'an)s to fin! more mort(a(es $ith

enticin( loan %ro!ucts to cancel out %otential !efaultin( loans lin)e! to MBs* "hey also

nee!e! a $ay to control the %resentation of these ris)s to the cre!it ratin( a(encies* "his

$as necessary in or!er to con&ince %otential in&estors to continue su%%ortin( these

mort(a(e 'ac)e! securities*

o +all treet encoura(e! the three 'i( cre!it ratin( a(encies 4Moo!ys, Fitch,

an! tan!ar! an! 7oor5 to stretch the terms an! stan!ar!s of $hat $as meant 'y lo$

ris)9 $hen analy/in( MB %ro!ucts* f anyone of the cre!it ratin( a(encies !i! not

coo%erate $ith a +all treet firms ratin( interests, that firm $oul! ta)e their 'usiness to

one of the other t$o ratin( firms*

ince these firms $ere %u'lically tra!e! on the stoc) mar)et, a loss of 'usiness

$oul! hurt their %osition in the euities mar)ets* Also, any !issatisfie! +all treet firm

coul! sell their shares $ithin that ratin( a(ency if it ha! a hol!in( $ithin it* "his create! a

situation $here the ratin( a(encies $ere issuin( ratin(s 'ase! on mani%ulation an! self

interest instea! of %ure o'.ecti&ity*


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+all treet financial en(ineers $oul! also etract the ris)ier as%ects of MBs

an! 'un!le them into financial %ro!ucts calle! collaterali/e! !e't o'li(ations 4D3s5*

"hese in&estment %ro!ucts consiste! of hi(her ris) mort(a(es com'ine! $ith other !e't

'ase! asset classes that $ere consi!ere! more sta'le9, to inclu!e cor%orate !e't, %u'lic

!e't, treasuries, etc* t $as another $ay of mana(in( ris) 'y mo&in( it some$here else*

"hese in&estment %ro!ucts $ere !ece%ti&ely %romote! to institutional in&estors

$ho !i! not ha&e a $ay to fully trace the un!erlyin( mechanisms of these %ro!ucts* "he

!ocumentary %ortraye! international in&estors as the %rimary sales tar(et of these

in&estment %ro!ucts, $hich ma!e it easier to circum&ent ; in&estment re%ortin(

re(ulations*

Last 'ut not least, he a&era(e consumer ha! a role to %lay in this %rocess* +e

shoul! 'e fair to the a&era(e consumer for not fully reali/in( $hat they $ere (ettin( into

!ue to a com'ination of !ece%ti&e sales %ressure an! (eneral i(norance of financial

matters* Ho$e&er, $e must not o&erloo) the ris)y euity 'orro$in( many mort(a(e

hol!ers un!ertoo) $ith their ne$ homes* ommon sense hol!s that $hat (oes u% must

come !o$n, an! euity 'orro$in( !ecisions ma!e !urin( a real estate 'u''le must 'e

!one $ith the un!erstan!in( that home %rices $ill le&el off*

ome home o$ners !i! not consi!er this, an! $hen the housin( mar)et starte! to

le&el off, they foun! themsel&es in a %osition $here they $ere ineli(i'le for refinancin(

since they the amount of their euity 'orro$in( $as (reater than the &alue of their home*

n this %osition, they coul! not a!euately res%on! $hen they nee!e! to refinance as

AM rates increase!* 7eo%le ha! to foreclose, $hich in turn o%ene! u% more su%%ly of

homes in the mar)et*


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"his %ut !eflationary %ressure on home %rices, $hich effecti&ely stalle! the home

euity an! refinancin( in!ustry an! the in!ustries lin)e! to them* "his e&entually

unra&ele! the housin( securities 'u''le, $hich $as %romote! on the i!ea that home

%rices $oul! only increase o&er time*

3ne must $on!er $ha the (o&ernment $as !oin( as this 'u''le !e&elo%e!< n the

!ocumentary, Alan Greens%an a(ue! that not much coul! ha&e 'een !one to control the

'u''le $ithout causin( it to %otentially %o%* t can 'e ar(ue! that a mo!est effort to raise

interest rates in the lea! u% to the 2008 financial crisis $as an effort 'y the Fe!eral

eser&es to control the 'u''le*

But this coul! only ha&e limite! effects* "his real#estate 'u''le $as 'lo$n u%

$ith the com'ination of lo$ stan!ar! loans, lo$ interest rates, mani%ulate! home %rices

an! securities, an! %otentially ris)y 'orro$ers* f the Fe!eral eser&e raise! rates to hi(h

an! too fast, it coul! %otentially %ut a!!itional %ressure on fra(ile, o&er eten!e! !e't

hol!ers 'y raisin( rates across the 'oar!* "his $oul! 'e another $ay to %o% the housin(

'u''le an! !isru%t all financial (ro$th lin)e! to this 'u''le*

"he only o%tion to slo$ this real estate 'u''le $as throu(h increase! (o&ernment

re(ulation 4at all le&els5 that %ut controls o&er lose an! !ece%ti&e len!in( stan!ar!s an!

financial re%ortin( metho!olo(ies* =et little $as !one in terms of (o&ernment re(ulations

an! le(islati&e controls to effecti&ely mana(in( these as%ects of housin( 'u''le u% to

2008*


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Ho$e&er, +all treet an! (o&ernment officials must ha&e ha! the common sense

to see $hat the outcome of this real#estate 'u''le* As a matter of fact, the !ocumentary

!escri'e! ho$ +all treet encoura(e! increasin(ly ris)y loans to less sta'le 'orro$ers

to$ar! the en! of the real#estate 'u''les final !ays as more an! more 'orro$ers $ere

foreclosin( an! the uality of remainin( %otential 'orro$ers !iminishe!*

"his, in my o%inion, in!icates that +all treet )ne$ $here this %rocess $as

hea!in( an! !eci!e! to scra%e as much as they coul! from the remainin( %ool of %otential

'orro$ers 'efore the final colla%se* "his coul! not ha&e ha%%ene! unless +all treet ha!

some influence o&er (o&ernment to )ee% this real estate 'u''le )ee% (oin( until the &ery

en!*

-ltimately, see +all treet, an! its influence o&er (o&ernment to remain %assi&e

as this 'u''le (re$, as the main %um% 'ehin! the real#estate crash of 2008* "he

conseuences $ere catastro%hic, affectin( all mar)ets lin)e! to this 'u''le* "he only

ones $ho 'enefitte! $ere the ones $ho really un!erstoo! $hat $as (oin( on* 7erha%s the

(o&ernment shoul! as) if it is %re%are! to !eal $ith the !ama(e to the national economy

if it allo$s it to ha%%en a(ain*

Brian Ghilliotti: Analysis of Documentary House of Cards

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