I movie called ‘Inside Job’. It was about the

Topic: EconomicsMacroeconomics
Sample donated:
Last updated: September 20, 2019

I watched the second part (‘The Bubble’) of themovie called ‘Inside Job’. It was about the biggest financial bubble in thehistory. On Wall Street, annual cash bonuses spiked.

Traders and CEOs becameenormously wealthy during the bubble.During the bubble, investment banks were borrowing heavily to buy more loansand create more CDOs (Collateralized Debt Obligations). The ratio betweenborrowed money and the banks’ own money was the leverage. The more the banksborrowed, the higher their leverage. Here comes one of the parts that impressedme. The SEC decided to relax the limits on the leverage ratio. This means bankscould borrow more money, get more leverage and higher profits. But if somethingwent wrong, everybody would face huge problems.

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Investment banks wereleveraging up to the level of 33:1. This means a 3% decrease in the value oftheir asset base would make them insolvent. So, they were just focusing on thatday’s profits but not thinking about future messes they could face. Second, I am surprised at the following idea, which is actually a great one interms of profiting but of course, not moral and fair. AIG started sellingderivatives and credit default swaps. This was a system where many people couldtake out insurance against other people’s risky loans, and they would all benefitif the loan failed. Here is a simplified example, if I owned a house, not onlyI could insure my house, but also other people could. So, if my house gotdamaged, I would get compensation and those other people, who had also insuredmy house, would get it as well.

This means the number of losses would becomeproportionately larger and correspondingly the number of profits of insurers.Finally, rating agencies were rating toxic and risky CDOs as highly safe asgovernment securities. Two-thirds of the loans were rated triple-A meaning thatthey were very secure but actually being not. And when rating agencies weresued for fraud, they answered “those are merely our opinions, you should notrely on it.”Overall, I am impressed how all of them gained some (and actually a lot of) benefitsfrom that situation at the expense of innocent citizens.

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