Random Thoughts – Randocity!

Rated: 4/5 stars.

PBS’ The Warning Documentary

The Warning is a PBS documentary discussing a warning from Brooksley Born, an attorney and a former Commodity Futures Trading Commission (CFTC) chairperson. She explained that derivatives were extremely risky insurance vehicles and sent a warning that these vehicles needed regulation during her tenure as CFTC chairperson, but her warnings went unheeded. She resigned in 1999 from the CFTC position after legislation was passed preventing her agency from regulating derivatives.

Vision of this Documentary

While I would like to rate The Warning higher, its take is pretty much tunnel vision on the derivatives markets. While the derivatives markets did melt down and did, to a large degree, spur the meltdown onward, the meltdown was not started because of derivatives. The derivative meltdown was a casualty of and was exacerbated by the sub-prime mortgage meltdown. Had the mortgage industry bubble not burst, the derivatives market might have gone unchecked for many more years. The warning was and should have been about placing regulations onto mortgage lending practices. The mortgage lending industry is the industry that failed and sent the economy into a tailspin, let’s make that perfectly clear. The derivatives (insurance) market, which speculated on the mortgage industry, single-handedly sent Wall Street into a tailspin (along with several large insurance companies like AIG).

Derivatives and the Mortgage Meltdown

Anyone with half a brain in their head could see that using questionable lending vehicles like interest only loans for the first two years or adjustable rate mortgages were ticking time bombs. When the actual monthly payments came due years later after rates went up to where they should have been, people couldn’t afford pay. This was especially true when lenders were handing these loans to people who could barely afford the ‘introductory period’ payments. So, loans came due, people defaulted and the rest is history. The derivatives (insurance policies) that were issued also came due because of the en masse foreclosures. Insurance companies that issued derivative policies speculating people wouldn’t default en masse began to fail because their speculation was wrong. So then, these insurance companies couldn’t pay off on the insurance claims. So, when consumers defaulted, so did the insurance companies offering derivatives.

It wasn’t as if warnings weren’t being issued regarding the inevitable mortgage meltdown, it’s just that Brooksley Born (the focus of this film) was not one of the people issuing the mortgage warning. Her warning was strictly about the highly risky derivatives. More specifically, the black box non-transparent nature of them. The danger, of course, is that derivatives can be placed on any speculative and risky investment as insurance. The reason derivatives need to be regulated is to prevent companies the size of AIG from making stupid decisions about such risky vehicles. However, from a consumer perspective, banks should never have gotten into the position of issuing such risky mortgages like water to people who couldn’t afford them. This was the single mistake that led to where we are today and that mistake has nothing to do with derivatives and everything to do with Government and the Federal Reserve making stupid decisions.

Overall, the movie is worth watching, but also understand its information’s place in the larger meltdown that was at work in our economy.