Zach Simons, Natalie Schuey, Jordan Welker, Brenden Harrington, Kyle Mele, Caleb Martin
In The Big Short: Inside the Doomsday Machine, Michael Lewis explains banks were lending people money to buy homes while they could not afford to pay back these banks. Credit ratings were given to loaners based on how risky their mortgages were perceived to be. People with a AAA rating were given the best interest rates while the lowest rating was a B with the highest interest rates. That being said, most of these credit ratings for these subprime loans were fraudulent with nearly 90% of Triple-A rating loans being misclassified. Lewis explains how interest rates were not a set rate and the mortgages were often bought and sold by different banks. With how much power the leasers were given to pick and choose interest rates they best saw fit for their clients and how easy it would be for them to sell said lease created the potential for moral hazard. As discussed in class, a moral hazard can be defined as the lack of incentive to guard against risk where one is protected from its consequences.
The bankers in The Big Short and the developers in Human Landscape in SW Florida both take advantage of the need for housing for their own personal gain. A risk to the lenders was the right for the borrowers to repay their loan once interest rates dropped. Lewis affirms that people in business come up with a “clever solution to the mortgage prepayment problem” (The Big Short, pg 7). Specifically the businessman at Salomon Brothers, who created the tranches by combining multiple homeowner loans into one giant tower. With riskier loans at the bottom of the tower paying the highest interest rate. The so-so loans in the middle of the tower pay less than the bottom but more than the top. The top of the tower, as the Big Short pointed at, has the safest loans and has the lowest interest rates. In a system where everyone must go through them in order to obtain housing, which is essential for survival, the lenders profit greedily off your credit, regardless of the level of the tower you are in.
This picture, from the article in The Picture titled “Human Landscapes in SW Florida”, depicts houses that were built very closely together in order to fit as many houses as possible in a specific area. These houses were built and funded by people with lots of money looking for big profits from the housing sales. This is because bank loans were being given out to so many people. We learn in The Big Short that the banks started to just give out loans to people that could not in the long run afford to pay them back so the companies would give out loans with a floating rate so they could sell it to other companies to profit. When The Big Short is talking about the lesson the banks learned from selling these floating rate loans it states “You can keep making these loans, just don’t keep them on your books.”(Lewis, pg 23). This statement alone shows the moral hazard and fraudulent behavior of these banks. They had no thoughts about how these would work out for the homeowners and only thought about profits.
This picture and the others in the article show a strong relation to the book. It shows how people were just building as many homes as they could so they could sell them to people and so the banks could give them a loan that they had no business getting. This gave way to a lot of expulsion in the housing market. As defined in class, expulsion is the act of depriving someone from a membership or organization. Although someone may have agreed on a loan with one bank, that loan was most likely to be sold without the buyer ever having a word in the whole process. With the lack of regulation from the government, many ordinary people were screwed over by their mortgages that they signed, sending the world into a financial crisis that cost millions of dollars in savings, retirement funds, housing, and jobs across the planet.