Verbitsky film investigates big business
October 20, 2011
Nick Verbitsky’s documentary “Confidence Game” was shown in the Brinkley Commons Atrium of the Business School on Thursday, followed by an informative question and answer panel. The panel discussed the film’s depiction of the pros and cons of big business in relation to the bankruptcy of large investment bank Bear Stearns and of the influence of companies deemed “too big to fail.”
“Confidence Game,” produced by Verbitsky’s company Blue Chip Films, made its debut earlier this year. The film reviewed the cause of Bear Stearns’s demise and showed the interconnected nature of U.S. financial institutions, which was responsible for the domino effect that ultimately lead to the world’s most harmful economic crisis since the Great Depression in 1929.
“People now regulating the banks are the ones who were involved in the first place. It is a disgrace to watch those things go on,” Verbitsky said during the panel. “People have no grasp of what the right thing to do is. They have no knowledge of how to solve this multi-layered problem.”
Verbitsky, along with three professors of the College—finance professor John Merrick, law professor Eric Kades and economics professor Till Schreiber—made up the question and answer panel that evening.
One attendee asked for clarification as to what “too big to fail” means and why companies are even allowed to grow as large as the Wall Street investment banks.
“There is no perfect answer. Bankruptcy and long-term capital problems are happening with more regularity,” Verbitsky said.
Bear Stearns was a major player on Wall Street, but was corrupt. While Bear Stearns earned copious amounts of money, it was a part of a very inefficient market dominated by a few monopolizing firms.
“The [financial] system is too interconnected to fail. There is no reason why we need five mega-firms. We should split them into 20 and spread the risk. Would the world end if that happened? Because there isn’t much efficiency gained by having these gigantic enterprises,” Merrick said.
During Bill Clinton’s presidency, the idea of owning a house came to be highly encouraged and homeowners were given tax incentives for home ownership. Because of this, large investment banks such as Bear Stearns became mortgage-lending machines and took on huge amounts of debt.
A pointed question was asked: Is “too big to fail” really a valid concern?
“Why do we have banks? People don’t want to take the time or effort to make sure money is safe and secure. Banks do all of that for you,” Schreiber said. “When a bank goes bankrupt, all of that information is lost, and it becomes a serious problem for the economy.”
For companies like Bear Stearns that are worth millions of dollars, it can become a very large problem. Large investment banks such as Bear Stearns were making corrupt deals in order to exchange and pocket more money. Not only was Bear Stearns using a hedge fund to offset its debt, but it also was able to sell risky mortgages to consumers because ratings agencies overstated their value.
“Security companies lost their ratings, which destroyed credit, and the market responded to that,” Verbitsky said. “Ratings agencies’s defense is that it was just an opinion. I think revision [of the system] is certainly in order.”
Large investment banks, including but not limited to Bear Stearns, communicated with smaller city banks after receiving the skewed ratings and sold mortgages in larger packages. Banks sold risky loans without even checking to see that their buyers had a steady income.
“Rating became an excuse, and bad business was legitimized. They were dodgy investments and were excuses to get into the deals without due diligence,” Merrick said.
When Bear Stearns was about to go bankrupt, JP Morgan Chase, another large investment bank, was persuaded by the government to lend Bear Stearns 30 million dollars in an attempt to save the company. JP Morgan Chase, however, shortened the typical loan repayment period from 28 days to just three, and Bear Stearns could not save itself. JP Morgan Chase bought the original shares for a meager two dollars per share.
Many wonder whether the company could have bought more time if media outlets and shows such as CNBC hadn’t scrutinized the actions and assets of Bear Stearns so closely.
“I’m not suggesting that CNBC’s speculations were made with malicious intent, but a lot of the reporters are not well schooled in finance. To allow people to sit there and have a coffee klatch is damaging,” Verbitsky said. “It’s important because there was nothing to substantiate their claims. A television program can inadvertently broadcast a four letter word and be fined millions, but a show like CNBC can speculate rumors, and it just baffles me.”