Aim of this game is to act out some of the relationships within the crisis.
Focus: the interconnectedness of different institutions and people, how we are tied to the financial system, the role different institutions played, the different financial instruments developed.
Props: Newspapers, String, fake money, AAA card, bike pump to pump the market,
Roles:
Narrator
Prospective homeowners
Mortgage seller (a banker) or a mortgage seller who liaises with the banks
Ratings agencies
Hedge funds, pension funds and other money market funds
Central bank
State
Deal out roles and props at the beginning?
The narrator can read out the action parts too as well as the narration parts just to make clearer what is happening.
~ end game~ discuss key points & any questions…
SCENE ONE: the Boom
Housing boom begins in 2001. Low US interest rates fuel the housing market. Predatory lending both by banks and mortgage dealers target the unbanked high risk population with the lucrative prospect of home ownership. They start giving out cheap mortgages to those who were seen as ‘sub prime’, meaning low credit worthiness and therefore very probable being unable to repay.
Actions: A mortgage seller waves around cheap money and offers mortgages encouragingly to the prospective homeowners. The prospective homeowner gives a sheet of newspaper to the mortgage seller. Newspaper represents a mortgage debt, meaning the promise that continual interest payments and the full value of the loan will be repaid at regular intervals. The prospective homeowner gets connected to the mortgage seller with string. This is repeated with a few people until it is visible that a few people are tied to the bank.
Narration card TWO: Securitisation
Narration: A lot of these mortgage sellers operated as long arms or fronts for big banks, others were more independent outfits funded through the financial markets. In any case, the mortgage boom was largely funded by the opaque method of securitisation. This process pooled all the mortgage debts from the prospective homeowners together, structuring them into bonds — mortgage backed securities — which were then sold on to other investors. (Explain a bit more here about how bonds work).
Action:
A banker comes and stands back to back with the mortgage seller. This mortgage seller passes on all the sheets of newspaper (i.e. the prospective homeowners mortgage debts) to the banker in exchange for money. S/he tears the newspapers into strips and mixes and matches different ones and crunches them up and creates several newspaper balls.
(pause)
Narration:
The newspaper balls represent mortgage backed securities: home-buyers pay interest on mortgages; their interest payments are mixed together by the bankers; and then banks pay on the interest to the investors who bought the mortgage backed securities. Another key player here are the Credit rating agencies. These are private companies that analyse the bonds and “rate” how safe they think they are, so giving the market confidence that the streams of interest will keep on flowing. Rating agencies get paid on commission by the banks whose products they will rate.
Action:
Credit rating agency now appears. The banker shows the newspaper balls to the rating agency person who looks at the pathetic crunched up newspapers and gives the thumbs up, showing ‘AAA’ card. This means these bonds are top quality investments, and act as a signal to other investors to buy them. The rating agency holds up high the AAA card for all to see. The banker gives the rating agency money.
Narration card THREE: Everyone gets involved
Narration: All the financial institutions, the big players get involved. These could be hedge funds, pension funds and other banks. So if we take the example of pension funds, they have collected everyone’s pension contributions into big funds and invest them in different financial instruments, like equities, bonds or other securities like CDOs. They see that these instruments are rated highly, and want to invest in them. They also buy them off the mortgage seller / bank. This allows the banks that originated the loans to earn more money and keep on giving out mortgage loans.
Action:hedge fund, pension fund, other banks persons appear, eyeing up the balls of crunched up newspaper. Seeing the ratings, they pay the banks to buy them. So some of the crunched up paper now goes to the different funds. The string is lengthened to include these people. Money cards and crunched up bits of paper are exchanged and going all over the place. More and more loans are given out to more and more homeowners. The bank itself will be buying these as well from other banks, so the bank too accumulates these. Accumulated debts go in a pile around people’s feet. This goes on and everyone is happy.
(pause)
Narration card FOUR: Crisis
Narration:
The music stops: housing market slows, and interest rates rise: prospective homeowners find it hard to meet mortgage payments. Rising defaults undermine the collateral base of the mortgage backed securities, i.e. the some of the strips inside the balls are now debts which will not get repaid. Asset prices are falling. Banks are feeling the beginnings of the credit squeeze and are now less willing to lend money against the mortgage securities.
Action:
A few of the prospective homeowners begin falling to their knees, pulling sharply on the string and making it uncomfortable or shaky for the bankers. Resize the crunched up balls: remove some of the strips and make half the size. Some bankers and fund people are still trying to borrow money from others, the other bankers / fund people refuse to lend them the money.
(pause)
Narration: Things get really bad abruptly, when everyone realised they have accumulated numerous (trillions) worth of assets they no longer know if they can rely on. Parts of the income streams they contain are defaulting and they don’t know how much what they have is worth. They know in fact that they have become bad debts, and can no longer get rid of them, nor can they obtain new finance to repay old debts. Lehman Brothers collapses. The credit crunch is here. All the dollars are ‘hoarded’, they’ve got the money, they just don’t want to lend it.
Action: More and more prospective homeowners are unable to pay, also falling to their knees and bringing the banks to their knees as well. People should start pulling on their string and moving around to show how chaos in one area affects all others.
(pause)
Narration card FIVE: Rescue
Narration: The central bank steps in and gives out money to encourage the bankers to lend to each other and for them not to collapse. The federal reserve pumps in massive amounts of liquidity to the banks. The banks use this money to hoard it. This fails to get the interbank market working again, and so the state comes in, bypasses the central bank and (part or fully) nationalises the banks.
Action: The central bank person comes in, and starts handing out dollar cards to the bankers who are on their knees, pumping air. Meanwhile home owners are falling flat on the ground. The bankers are still shaky and are on the verge of falling flat on the ground.
The state person steps in front of the central banker. The state buys major stakes in the banks, and therefore many of the crunched up newspapers get passed to the state, so the bankers now can stand up straight again. The homeowners remain on the ground. The state and bankers move close together, standing up.