The greatest achievement of THE BIG SHORT is its success in dumbing-down what are arguably the most complex financial mathematics and risk management concepts used by mortgage-linked derivatives experts, and bring them down to a level that the average movie-goer can appreciate. If they pay sufficient attention throughout the film.
Based on Michael Lewis’s bestseller by the same name, “The Big Short” tells the story of a handful of renegade traders who figured out that the subprime mortgage bubble would end in catastrophe, and bet against (i.e. “shorted”) it.This group made millions betting against subprime housing by buying up credit-default swaps on mortgage bonds.
The film educates the viewer using comedic episodes of analogies presented by celebrities in cameo roles, while keeping the rapid pace of the film’s storytelling continue without interruption. Standing in his kitchen, celebrity chef Anthony Bourdain cuts up three-day-old fish for a seafood stew while explaining how banks repackaged crappy mortgages into bonds. Selena Gomez joins behavioral economics professor & economist Dr. Richard Thaler at a blackjack table along in Las Vegas go over how a collateralized debt obligation works. Margot Robbie sipping champagne in a bubble-bath (remember “Wolf Of Wall Street”?) explains what it means to “short” something.
However, the real credit for storytelling belongs to the book’s author Michael Lewis who despite being popularly linked more to his book “Moneyball” (and the film based on it), has done more to help masses understand the financial complexity of Wall Street’s trading instruments. His books are a lesson in functioning of the bond trading markets and the history of how they came into being. The film is based on The Big Short: Inside the Doomsday Machine, a non-fiction book by Michael Lewis about the build-up of the housing and credit bubble during the 2000s. The serious enthusiast is also strongly encouraged to pick up a copy of Micheal Lewis’ groundbreaking first book LIAR’S POKER, as a way to catch the backstory of THE BIG SHORT as well.
Liar’s Poker is a non-fiction, semi-autobiographical book by Michael Lewis describing the author’s experiences as a bond salesman on Wall Street during the late 1980s. First published in 1989, it is considered one of the books that defined Wall Street during the 1980s, along with Bryan Burrough and John Helyar’s Barbarians at the Gate: The Fall of RJR Nabisco, and the fictional The Bonfire of the Vanities by Tom Wolfe. The book captures an important period in the history of Wall Street. Two important figures in that history feature prominently in the text, the head of Salomon Brothers’ mortgage department Lewis Ranieri and the firm’s CEO John Gutfreund.
A COMMENTARY ABOUT THE STATE OF OUR FINANCIAL SYSTEM Most economists blame the latest crisis not on Wall Street malfeasance but larger economic forces. Low interest rates and global flows of capital inflated the housing bubble. The growth of “shadow” banks, aided by financial innovation, drastically increased leverage and weakened underwriting standards while escaping regulatory scrutiny. Politicians’ obsession with home ownership caused them to turn a blind eye to the excesses of Fannie Mae and Freddie Mac and private lenders alike.
These forces created a misplaced sense of safety. The Federal Reserve’s success in stamping out inflation, moderating recessions and containing periodic financial mayhem—such as the 1987 crash—convinced investors, regulators and the Fed itself that it was safe to take on bigger debts. Underwriting standards collapsed because home buyers and lenders alike believed national home prices would never drop significantly.
That last happened during the Great Depression, and the Fed assured it would never let that happen again. Financial innovation reinforced that sense of safety. Mortgage-backed securities protected lenders from localized housing busts, and credit default swaps insured lenders against the underlying loans’ defaults. The widespread use of both inflated lending, prices and leverage.
Howie Hubler, a trader at Morgan Stanley profiled in Mr. Lewis’s book (but not the movie ) was like the movie’s protagonists, bearish on housing and bet against the lowest-rated slices of subprime-backed mortgage securities. But at the same time he made bullish bets on their triple-A-rated pieces, which tumbled in value, inflicting a big loss on Mr. Hubler’s firm. So even traders who correctly thought the housing market would collapse believed financial innovation had immunized some markets to the consequences.
Even if Wall Street financiers weren’t breaking the law, the money at stake clearly incentivized them to ignore Cassandras and suppress misgivings about the triple-A ratings. Upton Sinclair famously said, “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” “When you are incentivized to believe something, you will believe it.”
ABOUT THE FILM & ITS STORYTELLING CHALLENGES The biggest challenge for any director with a subject matter such as THE BIG SHORT to make a film on, is the question – how do you make a movie about the housing market, mortgage backed securities, collateralized debt obligations, collateralized debt swaps, and synthetic CDOs interesting for the average person. Clearly Adam McKay succeeded beyond expectations. Filmmakers have already approached the story from a number of angles, from sober-minded documentary (“Inside Job”) to operatic boiler-room drama (“Margin Call”) already.
Christian Bale’s quirky performance as one eyed Dr. Michael Burry (a one-time medical doctor sucked into the world of trading), whose Asperger’s Syndrome actually allowed him to focus on the minutia and discover the fraud before everyone else. Running a very successful West Coast hedge fund, Michael Burry is a stock-picking shaman with a glass eye and an utter lack of social graces, who crunches numbers while pacing his office barefoot and blaring heavy metal. By actually bothering to go through the thousands of individual mortgages that make up the securities that underwrite so much of the banking industry, Burry realizes that a dangerous number of subprime home loans are on the verge of going south, and decides to plug more than a billion dollars of his investors’ money into credit default swaps, effectively betting against the housing market. His seemingly insane investments create enough of a stir on Wall Street to attract the attention of alpha-banker Jared Vennett (Ryan Gosling, who also serves as the film’s foul-mouthed narrator, often breaking the fourth wall of film-making.
The finale of the movie is sobering and infuriating. After unequivocally proving that Wall Street bankers (aided and abetted by the Federal Reserve, Congress, the SEC and mainstream media), destroyed the global financial system, put tens of millions out of work, got six million people tossed from their homes, and created the worst crisis since the Great Depression, the filmmakers are left to provide the depressing conclusion.
“No bankers went to jail. The Too Big To Fail banks were not broken up – they were bailed out by the American taxpayers. They actually got bigger. Their profits have reached new heights, while the average family has seen their income fall. Wall Street is paying out record bonuses, while 46 million people are on food stamps. Wall Street and their lackeys at the Federal Reserve call the shots in this country. They don’t give a fuck about you. And they’re doing it again.”
EPILOGUE: Under proposals currently moving through Congress, our financial regulators are supposed to sit down together to identify and head off asset bubbles before they pose a risk to the system. But a bubble becomes a systemic risk only because it is not recognized as such.