Michael Lewis has done it again. My favorite author, whose “Moneyball” and “The Blind Side” were turned into great films, has teamed with Christian Bale, Steve Carell, Ryan Gosling and Brad Pitt to produce a wonderful movie which provides an entertaining, insightful review of the financial crisis of 2008/9 and answers the question: Was this financial calamity the fault of bad behavior or bad economic systems? The book (written in 2010) and the movie achieve their success by Lewis’s trademark technique of personalizing the tale, focusing on individuals who saw the rot in the system and tried to make money off that finding.
Christian Bale gives an outstanding performance as the real-life Dr. Michael Burry, a neurologist with Asperger’s syndrome, who became the eccentric manager of a small hedge fund. Through detailed research he discovers in 2005 that the U.S. housing market is extremely unstable due to subprime loans. He predicts the market will collapse in 2007 and realizes he can make a huge profit for himself and his clients by creating a “credit default swap.” (This is a considered a “short” because they profit if values decline). Trader Jared Vennett (Ryan Gosling) hears of Burry’s plan and decides to jump in. And hedge fund manager Mark Baum (in a masterful performance by Steve Carell) decides to join in as well. Vennett and Baum realize that the continuing sale of “collateralized debt obligations” (“CDOs”) by the big banks is further perpetuating the impending market collapse. Ben Rickert (Brad Pitt), an advisor to a hedge fund run by two young men who have just placed their short, is disgusted by their celebration of an impending financial disaster that, by now, is evident.
The film digs into details of the housing bubble, including 1) the stripper who owned five houses 2) the rows of empty homes in developments in FL, CA and Las Vegas 3) the mortgage brokers laughing about the loans they are able to obtain for their customers with little to no income. And all the while, the salesmen at the American Securitization Forum in Las Vegas are still pushing the sales of synthetic CDOs (with phony AAA credit ratings) to the very end. The disaster comes and our “heroes” make a nice profit while millions lose their jobs, their homes and their lives are altered, perhaps forever.
The Big Short pulled back the curtain about the true causes of the real estate crash that greatly influenced the Great Recession. These include:
- CDOs on subprime mortgages were at the heart of the crash
- Due to low interest rates, asset managers turned to high-yield mortgage-backed securities. Most of them failed to do adequate due diligence and relied on credit rating agencies (who were in a conflict of interest because they were paid by the big banks).
- Derivatives (such as “swaps”) had become a uniquely unregulated financial instrument.
- The Wall Street Journal missed the big story even when it was brought to them
- Hardly anyone went to jail for wrecking the economy
- Few laws were changed to prevent another such debacle
- When it was over, Wall Street wanted to place the blame on poor people, immigrants and teachers.
Wall Street would prefer we remember the crisis differently. In the WSJ opinion “Big Short, Big Hooey” on December 15, 2015, the movie was described as “partaking of what might be called the universal journalistic bias, namely to exaggerate.” The opinion from Rupert Murdoch’s paper would have us believe that:
- It was all the government’s fault for promoting home ownership for all
- The whole thing could have been avoided if only there were fewer government regulations
- It wasn’t so bad, really.
- A change in accounting rules could have avoided the crisis.
The fact is that The Big Short provides a clear assessment of blame: big banks behaved like criminals and for years got away with it.
It’s interesting, just last week, Goldman Sachs agreed to a civil settlement of up to $5 billion to resolve claims stemming from the crisis. Bank of America in 2014 paid about $17 billion in a similar settlement and JPMorgan Chase paid about $13 billion in 2013. In all, the banks paid more than $40 billion in settlements to resolve claims relative to the 2008/9 financial crisis. It appears that bankers don’t go to jail, their corporations just pay larger and larger fines.
The rise in dollar amounts in the last 10 years is extraordinary. Between securities fraud, tax fraud, environmental fraud and others, criminal penalties paid by corporations has risen from less than $1 billion in 2005 to over $9 billion in 2015, of which $7 billion was paid by banks. Penalties are really only a start; we would also like to see guilty bank executives prosecuted. Fines alone are not stopping bad behavior on Wall Street.
We hope you enjoy “The Big Short!” Even if it doesn’t take home an Oscar, it’s a winner.