My Take on “The Big Short”
Since there was a lag before this review would run, I focused on the role of the ratings agencies. An excerpt:
The Big Short leads viewers to believe that shortsighted greed is the ultimate explanation for why the ratings agencies gave their blessing to dangerous products. In one scene, a woman working for a major agency says that if her company doesn’t grant a triple-A rating, the Wall Street bank (which is their customer) will simply take the financial product in question down the street to a competitor to get a high rating from them.
This can’t be the full story. After all, why doesn’t every financial product get a triple-A rating? Why doesn’t every company bring its corporate bonds to, say, Moody’s, and demand a triple-A rating or else they’ll walk down the street to Fitch?
#Winning:
“No, the government must go further and specify which agencies are allowed to provide the ratings that are used when calculating “risk-weighted assets.” This crucial fact is a large part of why, even after the Big Three performed miserably during the housing bubble years, they are still in business.
“In contrast, in a free society, … If a bank wanted to attract depositors, it would need to convince them that its assets were sound. There would still be a role for ratings agencies, … but if there were a huge screw-up … then that company would be heavily punished. The rest of the market could quickly adapt and no longer treat that agency’s pronouncements as authoritative, because there would be no regulatory code declaring them so.”