On June 22, 2012, Scott Reckard writes in the Los Angeles Times t hat the credit rating downgrades included Goldman Sachs Group, JPMorgan Chase, Morgan Stanley, Citigroup and Bank of America.
“The move came as the 15 banks singled out by Moody’s try to navigate through the European debt crisis, which could have a major effect on their trading businesses. Eurozone leaders are trying to keep economic problems in Greece from spreading throughout the continent and beyond.
“Credit downgrades can raise borrowing costs and result in banks’ having to maintain more collateral to buffer losses in risky businesses such as the trading of volatile derivative securities.”
This story has prompted me to report on the excellent HBO Films docudrama Too Big To Fail reviewed in Issue 168, July/August 2012 at http://www.widescreenreview.com/hddisc_detail.php?recid=12890
HBO Films® critically acclaimed and Emmy® nominated docudrama Too Big To Fail present a searing and explosive account of the events that led to the 2008 financial crisis and how the U.S. economy was brought back from the brink of collapse. Based on the book by Andrew Ross Sorkin, the film offers an inimate look at the powerful men and women who decided the fate of the world’s economy in a matter of a few weeks. Centering on Treasure Secretary Henry Paulson, the film goes behind closed doors to examine the symbiotic relationship between Wall Street and Washington.
During the course of the story the U.S, financial breakdown is simply explained:
“Wall Street started bundling home loans together––mortgage-back securities––and selling slices of those bundles to investors. They were making big money. So they started pushing the lenders saying ‘come on, we need more loans.’ The lenders have already given loans to borrowers wit;h good credit, so they go bottom feeding and lower their criteria. Before, you needed a credit score of 620 and a down payment of 20 percent. Now they will settle for 500, no money down. And the buyer, the average guy on the street assumes that the experts know what they are doing. He’s saying to himself that if the bank’s willing to loan me money I must be able to afford it. So he reaches for the American Dream. He buys that house. The banks knew that securities based on shit-bag mortgages were risky. So to control their downside, banks started buying a kind of insurance. If mortgages default the insurance company pays––default swap. The banks insure their potential losses to remove the risk off their books so they can invest more and make more money. While a lot of companies insured this stuff, one was dumb enough to take on an almost unbelievable amount of risk…AIG. And when they ask me why did they do that? Fees! Hundreds of millions in fees. And they figured that the housing market would just keep going up. But then the unexpected happened. Housing prices go down. Poor bastard who bought his dream house, the teaser rate on his mortgage runs out, his payments go up, he defaults. Mortgage-backed securities tank. AIG has to pay off the swaps––all of them, all over the world, at the same time. AIG can’t pay. AIG goes under. Every bank that insured books massive loses on the same day. And then they all go under. It all comes down. The whole financial system? [Silence nod[ And what do I say when they ask me why it wasn’t regulated? No one wanted it…they were making too much money.”
http://www.latimes.com/business/la-fi-banks-downgrade-20120622,0,4841635.story
