Friday, February 5, 2016

The Long Con

The Oscars are coming up at the end of February. Every year, I get caught up in the buzz of the Oscar nominated films. And every year, I promise myself that I will see at least a few of them. By the time Oscar night rolls around, I am woefully unfamiliar with most of the pictures. Inevitably, I end up making my predictions based on the actors I like the best, or the films I read the most about in Entertainment Weekly.

This year, I am lucky to be dating a film enthusiast. He even watches movies with subtitles - something I have yet to do, but have promised to try. So last weekend Mark Johnson and I left the comfort of my little couch in Dearborn and went to the movies. We were on the fence between Brooklyn (a love story set in the 1950's), the Big Short (based on the real life story of the financial collapse of 2008) and Spotlight (starring my favorite actor, Mark Ruffalo. It's about the sexual abuse scandal in the Catholic church.)

We ended up seeing the Big Short. We had watched the previews for the movie, and we actually lived through the financial collapse of 2008, so we had a pretty good idea of what to expect. Or so we thought. Anyone who reads my blog knows that I've always had a healthy distrust of government, financial institutions and large corporations. But this movie portrayed the depths of greed, power and fraud that I could never have imagined. 

I really tried to pay attention during the actual financial crisis in 2008. I know that the financial institutions sold mortgage bonds on a bunch of bad mortgages. And they kept packaging and re-packaging them until everyone was invested in them to some degree. So when all of the people started missing payments and getting their houses foreclosed, the entire economy started to fall apart. 

But that isn't even half the story. It took a Hollywood film to simplify what happened in a way that I could actually understand. I think everyone should see this movie. But here's a quick summary of what I learned that I did not already know. 

It's true that they started packaging up bad mortgages into these mortgage funds and sold them to all of us, but what I never understood was how so many bad mortgages could have been given out in the first place. As it turns out, the banks were making a lot of money on the fees for writing mortgages and selling them to be bundled into these investments. So there was a huge incentive to create more mortgages so they could sell them back to us. 

As a result, they started giving mortgages to anyone. Literally anyone. They didn't need a credit check or credit history. Many of the new home owners barely spoke English. These brokers targeted people who had no reliable source of income and put them into mortgages with variable interest rates. They promised that when the rates went up, the people could just re-finance, which meant more closing fees for the banks and possibly a second mortgage to add into the bundles they were selling back to us as investments. 

The reason we were all willing to invest in mortgages is because they were considered a stable investment. But by giving them out to anyone, the banks and the mortgage brokers turned something stable into something unstable. In essence, they created the housing bubble that eventually burst. Meanwhile, we had no idea what they were doing. And they were making huge profits for every bad mortgage they sold.

The film doesn't really explain what the government knew. So we are left to believe one of two things. Either they knew something was wrong but they didn't have the courage to address it, or the regulators were completely oblivious to what the industry was doing. I tend to believe that they knew something was wrong, but they were under pressure from the big banks to look the other way. Plus, they could also take credit at election time for the record levels of home ownership among the lower and middle class.

The worst part about the 2008 financial crisis is that there were no consequences. We all know how the story ended. The taxpayers bailed out the financial institutions and for the most part, they went back to doing exactly what they have always done. 

After seeing the movie, I started thinking a lot about my investment portfolio. I have been diligently putting away money for my retirement since I was about 25 years old. And I always knew I was handing my savings over to people with some questionable ethical practices. But considering my very limited knowledge of financial investments, I thought it was best to leave it to the experts.

Today I look at things a little differently. First, I question whether the people working on Wall Street are really experts. They may have finance degrees and some experience, but it doesn't mean they actually understand what they are doing. In the 2008 financial crisis, it seems like many of them just blindly followed what everyone else was doing, rather than thinking for themselves. Also, I am not sure what they are doing is actually that hard. They want us to believe that it is really complicated so we let them manage our money instead of attempting to do it ourselves.

At this point, I am seriously considering pulling all of my money out of the market and hiding it in my mattress. I logged in to my retirement account to check my balances. There was an alert on my account that directed me to a retirement planning simulator. Based on their calculations, I have a huge gap between what I will need in retirement and what I am saving today.

At least that's one version of the story. There are two simulators you can use. The first one assumes an under performing market. The other assumes an average market. When I switched over to the average market simulator, it predicted that I would actually have a surplus of a few hundred dollars a month by the time I retire.

Of course, the retirement people are urging me to invest more money now so I can close this potential gap that may occur in 20 years. The more I think about it, especially in the context of that movie, the more ridiculous it seems. It is all a game to them. They want me to feel scared and uncertain about the future so they can manipulate me into giving them more of my money. And they are using the same tactics with everyone else too.

The future is uncertain. It always will be. And putting more of my money into an inherently risky market does not provide any greater level of security for my future. The banks and investment brokers are not waiting another 20 years to make their profits. They are using our collective retirement money to make their profits today. It's like a giant pyramid scheme.

For years, I avoided digging deeper into these issues because I thought it would only make me angry and I didn't want to waste precious moments of my life focused on injustices that I have no power to change. Seeing this movie reminded me that knowledge is power.

I may not be able to change the system, but I can choose whether or not I want to participate. 


Anonymous said...

Do yourself another favor. Find Madoff which aired last week. It is a 2 part 4 hour series about Bernie Madoff. Then let us know what you think.

Cupcake said...

Thanks, I will check it out! There is another movie about wall street called Money for Nothing. We might watch that one too.