Hamilton was good enough that I did a review just on it alone, but I recently saw The Big Short as well and decided to write something on both of them.
My background is accounting and finance and I like history a lot. When I moved from Canada to the USA, I decided I had to read up and study American history to get a better understanding of it. Simplistically, I was not really against the British in the American Revolution (Canada certainly is Loyalist) and the Civil War was just the good guys who were anti-slavery against the bad guys who were slavers. I delved somewhat into the Founding Fathers and the Constitution and tried to understand the first few Presidents and how their terms effected the USA. However, that was 20+ years ago.
When the financial crisis bloomed in 2008 (it had been growing for a while before that), many of my friends either were personally hurt by it or people close to them were hurt by it. When people are hurt they usually get angry or scared or both. People who are angry or scared tend not to think well, and they want to react. They need to blame and attack something. Bankers make a good target.
The Big Short and Hamilton both share the same great strength. They take what can be very dry history and they make it very interesting. By the time you finish watching The Big Short you have learned the tools that were used to both make the small problem into a catastrophe and to profit off of it. Hamilton has the battles and such of the Revolution there, but through song and comedy it really shows us the power of ideas and what happens when great men with powerful ideas are at a fulcrum point in history.
So, I bet even before you watched The Big Short, you knew that the bankers were at fault based on politics and news for the past decade or so. They were corrupt. They were greedy. They were liars. And the movie reinforced it. So funny and witty to see the heroes of the movie realize the illusion that everyone was living in. The stripper with all the houses and loans and the real estate agent talking about a gully when there actually was a cliff. The bankers laughing and smirking at our heroes as they made money and tried to pretend that the bets they made were not bad even when there was no denying that they were.
All a consistent message that those banks were the ones to blame and of course where there are banks there are bankers.
Personally, I find it funny that heroes worked for 3 hedge funds. Normally hedge funds are villains too in popular press and politics. In the story, they were smart and right and made a fortune, they took a noble stand and stuck to their beliefs even when others around them doubted them and scorned them. It made for a great film, but I hope everyone knows that hedge funds often are the main financing source for movies and that they just might have a small reason why they would fund and fill up a movie with A-list stars that just so happens to show the hedge funds were the only heroes in a time of greed and evil. It also ignored all the hedge funds that lost a fortune then.
I am going to write some posts in the CFO/Finance Tuesday posts on some of the tools used and I am also going to discuss corporate governance. Discussing tools and basic corporate governance is not really worth the effort without a basic criteria being met. You cannot use tools and make decisions without critical judgment and the ability and desire to do a little research on the item you are making a decision or judgment on.
You may be shocked to learn this, but it was not the bankers and their CDO that caused the crisis. It was you and me. We wanted to own our own houses. We have wanted to have our very own place to own and live since before the country even came into existence. We have voted in people that would facilitate that for generations. All those bankers and government people, they are us. Our neighbors. People we do business with and who probably have helped us all our lives (credit cards are a banking innovation).
The base laws that were changed and pushed us over the edge were passed by Bill Clinton with a Republican Congress. He repealed the Glass-Steagall Act that kept different banking functions separated and controlled the size of banks (which at the time was viewed as making American banks less competitive on the world stage). He also signed the Community Reinvestment Act that placed additional pressure on lending into low income areas. He signed a law that removed federal regulation on some credit swaps that became important leverage tools that later blew up.
Clinton and the Republican congress are not solely to blame, of course. There are whole books on this but essentially laws were passed that made possible to have the Federal government guarantee mortgages. Mortgages that have tax deductible interest which is really just a way to increase how much you can borrow and make buying a house easier. If you happen to sell a house and make a gain, well, that is no problem too. If you buy another house for more then no taxes are due on the gain.
We’re the people that elected and lauded the government that made all those changes. The changes even do not make sense. Cheaper mortgages just mean that you can afford to pay more for the same house so housing values rise. That means you need to borrow more, so you pay more interest than you might with no interest deduction. All these laws are meant to make it easier for the poor and middle class buy houses, but I am sure that you know that rich people pay higher percentages of their income as taxes so they get more from this law than the poorer people do. Many small mortgages do not even have enough interest to mean that you use anything but the standard deduction. Richer people also can afford more expensive houses so they get more tax relief on capital gains.
More mortgages led to bundling them together and making the mortgage bonds. This was all backed by the rating agencies which just happen to enjoy special laws and protection. Those bonds were made even safer via government guarantees. Bonds that did not have the government guarantee needed other guarantees and private insurance was created and more exotic credit swaps sprang into existence. We all wanted homes and we wanted our local bank to lend to us and that bank needed money from somewhere. Global investors wanted safety and higher yield.
Leverage, leverage, leverage and it all rested back on the faith and confidence of the United States.
Where did that confidence come from? The faith in the credit of the United States?
It came from one brilliant man. One of the founding fathers. The first Treasury Secretary.
Alexander Hamilton created it.
He gave us the fulcrum right when the country started.
We made the lever that rocked the markets and brought them all tumbling down.
Luckily Hamilton and the other Founding Fathers also left us a system of government that has worked so well for so long that with just a few words and promises, they were able to lift it up again enough to hopefully give us time to sort it all out. But if you need to blame someone and don’t want to point fingers at yourself, blame Hamilton.
Obviously that is somewhat tongue in cheek. The real point is to do a little research before making a snap judgment. Assume that others have agendas that make them want to make motives and who gains and loses as obscure as possible. Tax deductible interest makes for larger loans and more interest which helps the banks and they certainly do not want that to go away. Easy enough to lobby on the supposed benefit to the little people when it really just helps the fat cats.
My Tuesday posts will all have critical thinking as an assumption. The above is an example. Don’t take my word for it. Use your favorite search tool and spend a few hours doing some reading. In your finance and leadership career be informed. Don’t read only things that make you comfortable.
And blame Hamilton for getting himself shot before he could get the rest of his work done.