Too Big To Fail is a movie released by HBO in 2011. With much of the movie taking place in 2008 during one of the worst financial times in United States history, investment banks and the Treasury had to try to negotiate deals to save the United States market. The mortgage crisis was affecting the banks and was getting worse by the day. A lot of events took place in Too Big To Fail including trying to save Leeman Brothers which was the fourth largest investment bank in the United States prior to filing bankruptcy in 2008. The Treasury worked with other investment banks to help save Leman Brothers from bankruptcy; however they ran out of options. Despite believing that it was a success even according to Congress, there were big consequences abroad the United States. A bank in France had called regarding that their crisis has hit them. In the end, the last plan TARP (Troubled Asset Relief Program) which was approved by investment banks. This was a federal government program to buy toxic assets from financial institutions in order to save the economy.
There are plenty of terms and topics regarding finance in this movie as it is among finance. Toxic assets are notable because in the end of the movie because of the TARP program. Collateral is term that was brought up when they found out Lehman was holding $70 billion in assets but with not collateral. Capital was a financial term discussed in various ways throughout the movie with one being that Lehman Brothers had failed to raise capital. A term in finance I learned in this movie was derivative. Not the derivative term I know in Calculus but a financial term Henry stated in which deregulations and derivatives that got the country in a financial mess. Short selling was mentioned saying that the short sellers are a problem as Dick Lehman are distorting the firm. A credit rating agency is a subject in finance that was brought up in the movie. Moody’s is one of those agencies that was said to have downgraded A.I.G. after the Lehman bankruptcy. Another finance term in the movie is dividends. In the movie, Buffet asked for a dividend of 9% for some shares. Government intervention was brought up several times regarding to help save the banks. An example being that it was said that government intervention would have been seen as a sign of extreme peril in the global financial system.
According to Investopedia.com, toxic assets are defined as assets that become not liquid anymore when the secondary market for purchasing and selling them vanishes. Even though toxic assets can’t be sold for the reason being one’s perception that it is a guaranteed means to fail on making money, TARP was brought to the table in the end of the movie which had the government purchase these toxic assets. They became hard to move in 2008 which resulted in a large portion of worrisome assets. They are a threat to banks and devastated the balance sheets of many financial institutions. These assets become toxic by mortgage holders defaulting on their mortgages and its securities become hard to sell.
Collateral is listed in the textbook as property that is pledged to the lender to guarantee payment in the event that the borrower should be unable to make debt payments. In chapter 7 the book states that collateral is a dominant feature of debt contracts that applies to both businesses and households. Collateral also helps lessen the consequences for adverse selection because it decreases the lenders losses in the situation of a particular default. An example of how collateral works is given in the textbook explaining that if a borrower defaults on a loan, the lender can then sell the collateral and use the funds to make up for what was lost in the loan. As capital is what firms and businesses seek, capital is wealth which can be either physical or financial, which is essentially what generates more wealth. As the textbook defines capital as wealth, chapter 2 of the book which is the overview of the financial system, is a general term in finance that is strictly important to financial markets. It must be made efficiently and contributes for a healthy general economy. Financial markets and investment banks must maintain a productive means of wealth to keep the economy running.
In the movie derivatives were said to be at fault and affective to the market crisis. Investopedia defines a derivative as a financial security with a worth that is dependent upon a collection of assets. The actual derivative itself is a mutual contract amongst more than 2 or 2 parties. The price of the derivative is figured out by variations of the underlying asset. Examples of underlying assets are bonds, currencies, interest rates, and stocks. They can be traded either by over the counter or by exchange. Sort sellers seemed to be an issue to the financial institutions in the movie. Short sales are defined in the textbook as an agreement with a broker to sell and borrow the securities. When the securities are borrowed, they are replaced with further securities purchased later. Also short sellers earn profits from falling prices of securities. After they borrow stock from brokers, they try to sell it back to the market hoping that they can make a profit by buying the same stock back.
Credit rating agency is a topic in finance that was brought up in the movie, not the topic overall, but Moody’s corporation which is a credit rating agency. These kinds of credit rating agencies are investment advisory firms that give a rating of the overall quality of municipal and corporate bonds in terms of the chances of a default. Moody’s is a part of the 2 biggest credit rating agencies in the United States. The bond ratings are set from high risk to low risk. Bonds with more of a lower risk of default are named investment grade securities which have ratings of Baa or BBB and above and bonds that have higher default risk are noted as speculative grade or also known as junk bonds. Those bonds go ratings of below Baa or BBB. Dividends are simply defined as periodic payments made from equities to its shareholders. Dividends also have no maturity date. The payments are also considered long term securities for that reason. Dividends can be likely less certain when a firm is in trouble thus resulting in stock having more risk.
