The big short and the long con

January 21, 2016

Hollywood does a decent job of explaining the financial meltdown, writes Phil Gasper.

THE BIG Short opens with a quotation from Mark Twain: "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so."

What most Wall Street executives, financial brokers and government officials knew for sure 10 years ago was that there was no housing bubble, and that the U.S. and the world economies would continue growing steadily into the indefinite future.

Leading economists argued that not only was the economy healthy, but major crises were no longer possible. "The central problem of depression-prevention," the Nobel Prize winner Robert Lucas told the American Economic Association in 2003, "has been solved."

Then came the financial meltdown of 2008, and the U.S. economy was pitched into the depths of its biggest crisis since the Great Depression of the 1930s.

There had been a series of major bankruptcies throughout 2007, but the warning signs were ignored. Then, in March 2008, the investment bank Bear Stearns collapsed and was bought up by JPMorgan Chase for pennies on the dollar. In July came the failure of IndyMac Federal Bank, and the country's two biggest mortgage lenders, Fannie Mae and Freddie Mac, lost half their value.

Steve Carell (foreground left) and Ryan Gosling (foreground right) in The Big Short
Steve Carell (foreground left) and Ryan Gosling (foreground right) in The Big Short

Two months later, on September 15, came the implosion of the investment bank Lehman Brothers, the biggest bankruptcy in U.S. history. Fearful that the whole financial system was about to collapse, the Bush administration stepped in to bail out AIG, the world's biggest insurance company, before it suffered the same fate as Lehman.

Over the next few weeks, even more banks in both the U.S. and Europe collapsed, while others announced huge losses. Only massive intervention by the federal government prevented the economy from imploding. But we all know the story--the banks got bailed out while U.S. taxpayers and workers have been paying the price ever since.

THE FRAUD, greed and corruption leading up to the financial meltdown were examined in the Oscar-winning documentary Inside Job in 2010, but nobody watches documentaries, so Hollywood returned to the story in The Big Short, a dramatization that is already reaching much bigger audiences.

The movie is based on the Michael Lewis book of the same name, which told the story of several groups of investors who figured out that the housing bubble was about to burst and made hundreds of millions of dollars by "shorting" the market--essentially placing bets that it was about to fail.

Review: Movies

The Big Short, directed by Adam McKay, written by Charles Randolph and Adam McKay, starring Christian Bale, Steve Carell and Ryan Gosling.

Christian Bale plays Dr. Michael Burry, who gave up his medical career in the early 2000s to become a hedge fund manager in California. Burry was one of the first people to realize that securities traded by Wall Street that were based on subprime and adjustable-rate mortgages (ARMs) would become essentially worthless as the default rate on the underlying loans began to creep up.

The movie shows Burry doing what no one else had done--meticulously going through the records of thousands of loans on which mortgage-backed securities--otherwise known as collateralized debt obligations, or CDOs--were based and discovering how many of them had already gone bad.

Burry created so-called "credit default swaps" to bet against the market, but had to fight against his own investors in the hedge fund, who were convinced that he was throwing their money away.

Meanwhile in New York, bond trader Jared Vennett (Ryan Gosling) learns what Burry is up to, and teams up with another hedge fund manager, Mark Baum (Steve Carrell), to also short the market.

Baum and his team start investigating the whole housing market and discover the basic ingredients for a financial disaster--mortgage brokers in Florida making large amounts of money by foisting ARMs on home buyers who will never be able to pay them back; investment ratings companies, like Standard & Poor's, rubber-stamping CDOs as AAA investments because they don't want to lose business to their rivals by giving them a proper classification; and bankers who have built an enormous financial edifice based on the assumption that the housing market is rock solid.

A third group of investors--Jamie Shipley (Finn Wittrock) and Charlie Geller (John Magaro), who run a tiny start-up hedge fund, and their mentor, disillusioned former trader Ben Rickett (Brad Pitt)--also figure out what is going on. They talk to an employee of the Securities and Exchange Commission, the government watchdog in charge of financial markets. But her main priority is to leverage her background as a very unwatchful watchdog to land a high-paying job in the private sector.

THE MOVIE is fast-paced and uses various gimmicks to explain key aspects of the financial system. Celebrity chef Anthony Bourdain explains CDOs by comparing them to stew made with three-day-old fish, and pop star Selena Gomez sits next to behavioral economist Richard Thaler in a Las Vegas casino to illustrate the irrationality of so-called "synthetic CDOs"--you'll have to see the movie if you want to know what they are.

But was it really necessary to put actress Margot Robbie in a bubble bath drinking champagne to explain subprime mortgages? That tells you something about what audience director Adam McKay has in mind for his film.

In fact, the only woman in the movie with more than a cameo is Marisa Tomei, who plays Baum's wife--and she gets to do nothing more than provide him with support and a sympathetic ear.

Then again, most of the male characters are undeveloped, too. Gosling's Jared Vennett is not much more than a two-dimensional cardboard cutout. We know a little bit more about Rickett and Burry, but not why the former quit banking or the latter gave up neurology.

The character we learn most about is Mark Baum, and the film revolves around him raging against the injustice of the financial system--while raking in a handy profit for himself at the same time.

The bottom line, though, is that the characters are largely vehicles to tell the story of the financial crash, and the movie does a pretty good job of laying out the immediate causes and why it's right to blame the big banks.

Of course, The Big Short doesn't (and probably couldn't) explain the underlying systemic problems that gave rise to the housing bubble and weakly regulated financial markets in the first place. For that, you should read David McNally's Global Slump: The Economics and Politics of Crisis and Resistance.

That's more important than ever, since the underlying problems that led to the 2008 financial meltdown haven't gone away--and all the signs at the start of 2016 are that we may face the next big economic crisis in the not-too-distant future.

Further Reading

From the archives