At the movies: The big dogs ate your mortgage
Special to Lake Tahoe Action
THE BIG SHORT
Directed By Adam McKay
Starring Christian Bale, Steve Carell, Ryan Gosling, Brad Pitt, Steve Carrell, John Magaro, Rafe Spall, Melissa Leo, Hamish Linklater, Marisa Tomei, Margot Robbie, Selena Gomez
Rated R, Drama, 130 minutes
“The Big Short,” a film detailing the 2008 financial collapse, seeks to illuminate the system that caused the housing bubble of the early 2000s. Specifically, it was a perfect storm of low interest rates, escalating home prices, and ARMs or adjustable rate mortgages that generally began at very low payments. The banks grouped thousands of these mortgages into CDOs (Collateralized Debt Obligations) and sold them as Triple A-Rated bonds paying bond holders 8-15% interest per year.
Seen from the perspectives of four insightful traders, the film, adapted from a critically-acclaimed Michael Lewis book, sets about acquainting us with the increasing instability that resulted from writing low-interest adjustable rate mortgages (ARMS), also known as subprime mortgage loans. These instruments of evil handed out low mortgage payments for the first two years, then reset the payments, tying them to ever-escalating rates that home buyers simply could not pay. These “set to fail” mortgages comprised greater and greater percentages of CDOs being floated, yet were still rated as “Triple A,” or low risk, by poor standards, oops, I meant, Standard and Poor.
The first man to see the coming disaster was ex-neurologist Michael Burry (Christian Bale). His talent for understanding numbers belied his penchant for wearing shorts and flip-flops while listening to heavy metal music. In 2005, Burry spots the disconnect between the true value of the CDOs and their Triple A bond ratings. He sees that the increasing number of mortgage defaults are sure to eventually crash the CDO market. However, there is no instrument available to place bets on CDO failures, meaning Burry must convince the banks to allow him to bet against or “short” the CDOs using an instrument called “Swaps.” Convinced Burry was a fool, the banks were only too happy to take his money and sold him the Swaps.
Burry manages a San Diego investment fund, where due to his brilliant past performance, he has an unprecedented ability to alter the conditions of the fund in any way he deems necessary. After persuading the banks to sell him 1.3 billion dollars in swaps that will pay enormous dividends should the CDOs fail, Burry must make significant payments to the banks so long as the CDOs remain solvent. To protect the cash flow allowing Burry to tender these payments, he institutes a moratorium preventing his investors from withdrawing any of their money from his fund. This scares and angers Burry’s major investors.
Meanwhile, various others hearing of Burry’s bet, conduct their own investigations into the CDO market, that result in winning them over as well as wanting in on the action. One such player is a banking exec who creates and sells additional instruments for betting against the CDOs (Ryan Gosling). He persuades a group of Lehman Brothers hedge fund traders led by Mark Baum (Steve Carrell), to buy in. Next, a pair of maverick young traders played by John Magaro and Rafe Spall, stumble upon one of Burry’s reports, and persuade retired investment guru Ben Rickert (Brad Pitt) to help them acquire “Swaps” of their own. Note: The characters are based on an actual people, although some of the names are changed.
In telling its three parallel stories, the film indulges a cynical brand of humor that allows us to laugh both with and at its protagonists. More than recognizing their brilliance, we’re stupefied by discovering that the rest of the world remains clueless to the coming death spiral of Triple A-Rated CDO Bonds.
Back in the days of innocence, lawyers were the least trusted folks on the planet, but in the wake of this debacle, financial institutions and government oversight agencies now top the list. We might want to rethink letting the wolves guard the hen house because in general, we’re the hens. For future reference, remember, Triple A could mean Awful Awful Awful.