The Big Short

The financial collapse of 2008, leveraged by the sub-prime mortgage market, is a curious phenomenon. I felt its effects through my IRA investments, which lost thirty to forty percent of its value over a period of six months. However, this money was never real to me since I hadn’t used it and much of it was built on a strong stock market for nearly twelve years. I was anguished to see the numbers drop each month and panicked, moving half of the money to an interest-bearing account. How the collapse occurred I had gleaned from several interviews on NPR but, overall, didn’t really understand it. Watching The Big Short (2015) helped me figure out some of the general abominations occurring on Wall Street and investment companies, but I doubt if I could explain it very well.

The film understands my and your levels of ignorance and has fun dealing with this by using a few analogues to explain how the sub-prime mortgages worked. Andre Bourdoin is enlisted in one, describing the CDO (Collateralized Debt Obligations, a.k.a. worthless mortgages) as follows:

1) You have a three-day old halibut that you don’t want to get rid of;

2) Place the halibut into a fish stew and make its awfulness disappear; and

3) Promote the stew as if it were new and fresh – triple A meal.

The financial wizards who discovered this mess are incredulous.

Michael Burry (Christian Bale) is the first to discover this:

Michael Burry: I want to buy swaps on mortgage bonds. A credit default swap that pays off if the underlying bond fails.                                                                                                                                

Goldman Sachs Sales Rep (Lucy): You want to bet against the housing market?                                

Michael Burry: Yes.                                                                                                                                        

Goldman Sachs Quant (Deeb): Why? Those bonds only fail if millions of Americans don’t pay their mortgages. That’s never happened in history. If you’ll forgive me, Dr. Burry, it seems like a foolish investment.                                                                                                                                                        

Michael Burry: Well, based on prevailing sentiment, the market, the banks and popular culture, yes, it’s a foolish investment. But, everyone’s wrong.

A group led by Mark Baum (Steve Carell) are pitched by Jared Vennett (Ryan Gosling), who works at the Deutsche Bank (which make CDOs). Baum doesn’t know whether to believe Vennett since it would mean everyone is involved in hiding the truth about the perilous nature of sub-prime mortgages, so he takes his team to Florida to personally investigate the situation. They discover that companies are selling the most mortgages to people who can’t afford them in the long run (six months!).

Mark Baum: Okay, look. If home prices don’t go up, you are not going to be able to refinance. And you’ll be stuck paying whatever your monthly payment is once it jumps up after your teaser rate expires. Your monthlies could go up two-, three-hundred percent.                                                                                

Florida Strip Club Dancer: James says I can always refinance.                                                                     

Mark Baum: Well, he’s a liar. Actually, in this particular case, James probably is wrong.                    

Florida Strip Club Dancer: 200 percent? On all my loans?                                                                             

Mark Baum: What do you mean “all” your loans? We’re talking about two loans on one house, right?

Florida Strip Club Dancer: I have five houses… and a condo.

Michael Burry, for his part, had examined every mortgage made at that time.

Lawrence Fields: And how do you know these bonds are built on subprime crap? Aren’t they filled with hundreds of pages of mortgages?                                                                                                                    

Michael Burry: I read them.                                                                                                                          

Lawrence Fields: You read them? No one reads them. Only the lawyers who put them together read them.                                                                                                                                                                    

Michael Burry: I don’t think they even know what they made. The whole housing market is propped up on these bad loans. It’s a time bomb, and I want to short it.                                                                      

Lawrence Fields: Through what instrument, Michael? There are no insurance contracts or options for mortgage bonds! The bonds are too stable. No one would buy them.                                                          

Michael Burry: I’m going to get a bank to make me one. Then I’m going to buy a ton of them.

Another pair of small time investors, who discover the short selling on their own, with coaching from Ben Rickert (Brad Pitt), try to join the others, although independent of them, in betting on the probability of a global financial collapse. It had become obvious to them and the others that the banks, the SEC, and bondraters had rigged the game.

From afar, say back in 2009-2010, we might have been outraged by their greed and immorality. Didn’t they have a duty to inform the world at large of these dealing by the large banking and investment firms? Didn’t they make tens of millions of dollars on the backs of the American investor?

The film dramatizes their awareness of the dubious moral position they were in. Make no mistake, all of them wanted to cash in on a sure thing. But they also tried tried to make their own companies aware of what was happening – the small time investors went to a writer on the Wall Street Journal – but to no avail. In fact, all of them could have made billions of dollars; however, when the sub-prime market collapsed, the big banks kept the bond ratings artificially high until they could sell them (labeled triple A) to unsuspecting investors.

Briefly, The Big Short deals with the government bailout, suggesting that Goldman Sachs and the rest were depending on the federal government not letting them fail. Understanding the breadth of such a catastrophic end to our large financial institutions may be beyond any film’s ability, or even a documentary or future history books. Worse, it appears the same institutions are reverting to the practices that led to the 2008 collapse:

Jared Vennett:  In the years that followed, hundreds of bankers and rating-agency executives went to jail. The SEC was completely overhauled, and Congress had no choice but to break up the big banks and regulate the mortgage and derivative industries. Just kidding! Banks took the money the American people gave them, and used it to pay themselves huge bonuses, and lobby the Congress to kill big reform. And then they blamed immigrants and poor people, and this time even teachers! And when all was said and done, only one single banker went to jail this poor schmuck!

I watched The Big Short the day after seeing Executive Action (1973) and was struck by the plot similarity: Wealthy business men plot to undermine the American system: the former are doing it financially; the latter, politically.

The fundamental difference between the two groups is that the businessmen trying to kill President Kennedy had a vision, albeit corrupt, of what was best for America. They may have been hypocritical, racist, and elitist, but there’s something fundamentally innocent about their motivations. As a mentioned in the blog on Executive Action, the man organizing the conspiracy had a peculiar view on overpopulation, believing there would be too many non-whites and suggested a means was being developed to curb this development.

Mark Baum called the CDOs “dogshit wrapped up in catshit” which were then given a Triple A rating. He also comments on those who brought us the 2008 economic disaster:

We live in an era of fraud in America. Not just in banking, but in government, education, religion, food, even baseball… What bothers me isn‘t that fraud is not nice. Or that fraud is mean. For fifteen thousand years, fraud and short sighted thinking have never, ever worked. Not once. Eventually you get caught, things go south. When the hell did we forget all that? I thought we were better than this, I really did.

It nearly seems laughable that the wealthy elite would care what a President would do.  Wall Street and the investment community cannot be controlled. Dealing with them is more difficult than stamping out the Mafia. The Koch Brothers have developed their own methods to influence policies on Climate Change and Medicare. They certainly wouldn’t jeopardize their social and economic positions by getting mixed up in an assassination plot. The businessmen in Executive Action come across as amateurs by comparison.


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