The Folly of The Big Short

Before I get to critique, and there will be plenty, I have to give the movie credit where it’s due: it does an excellent job describing the convoluted structure of the products to a layman. The movie is good at describing all the details of the trade that up until now were the province of finance bloggers. Everything about the swagger and the conferences and the various participants is true. SEC was toothless and uninterested at doing their job; rating agencies didn’t want to ruin their profitable relationship with the banks; the traders are young, white, haughty and male. They even mentioned the ABX index – an obscure but important gauge of a subprime market back in the day. The pivotal moment did indeed come during the ASF in Vegas in January of 2007. The subprime market, measured by the ABX did fall about 2-3 points during the conference. It was an unprecedented move, as the index usually moved about a few ticks up until that point.

But that’s where the movie’s merits end. The first thing that I found hard to believe is how the shorts – that is the guys who shorted the market – are portrayed. You see, when you’re short and the market goes down the last thing on your mind is who’s on the other side of the trade. It’s the truth that is founded in our own fallibility. But the narrative makes all kinds of efforts to make us like the protagonists. We are told that they are brilliant oddballs, unlike the stiff Wall Street suits represented by Goldman and Deutsche bankers. I have difficulty reconciling this depiction with their actions. When you make money – that kind of money, hundreds of millions, billions – you celebrate. You’re exhilarated, even gleeful. Your longshot bet just paid off! You don’t give sermons, like Brad Pitt’s character, in a half ass attempt by screenwriters to make him look human, about how the little people are about to lose their homes and jobs. That just isn’t believable. But here we are led to believe, rather clumsily, that these guys care about the downtrodden because they are shown saying a few high-minded words to their underlings.

Second, if we have established, like the writers would like us to, that these guys actually have scruples and principles that the bad greedy bankers supposedly didn’t, then why didn’t they abandon their positions and the industry in disgust and went to live on a ranch somewhere? Many of the real life characters are still somehow involved with the industry – trading commodities (like water) or running their funds.

Third, the idea that aside from 6-7 prescient people described in the movie no one has known about what was coming is a big stretch. I understand it from a dramatic perspective of a movie, but if the film advertises itself as a serious unbiased version of events then we are not getting the full picture. We are told that no one bothered to look at loan level tapes except for Michael Burry and that’s just not the case. I mean you’re telling me that thousands of investment banking analysts, who have been crunching numbers and loan level files from subprime lenders day and night, didn’t notice that the quality of those loans was becoming worse and worse with every tape they received? That they didn’t see those low FICOs and NINJA documentations and high LTVs? That it is only those few heroic outsiders who bothered to do that? That’s fantasy realm. Every trader worth his money, and there were plenty of brilliant guys (and I’m not necessarily talking character, I’m talking professional acuity) on the trading desks, will know what it is he’s trading. The problem wasn’t that people were oblivious; the problem was that many had perverse incentives not to know. And for those who knew, it was the timing and the scope of the collapse that was a big unknown variable. And, as we saw in the movie, people got burned by being short too early.

The audience’s ire is redirected from the guys who actually shorted the market to the guys who facilitated it. Surely, the guys who facilitated it – the banks, Greg Lippmann, Wing Chau – are not without blame, but let’s not let the hedge funds off the hook. Before Michael Burry and Co. decided to short the mortgage market there wasn’t even a product available on the Street that would enable them to do so. It had to be created specifically for them as we see during the course of the movie. It was that demand for shorts that drove the issuance of shittier and shittier CDOs – so that there were something to bet against. Without that demand, perhaps, the housing collapse would be contained. They use the world’s old trick of blaming the prostitutes but not the clients.

The bigger story that got swept under the rug is why and how it was possible. This should have been a story about the realm with no rules, or the rules that are written by players as they go. When we’re told that those new products, those weapons of mass destruction are created on the fly, as the demand appears, this pivotal piece of info is presented as merely a passing link to a more audience-friendly story – the good old story of stupidity and greed. The viewer will leave the theater thinking it’s the greedy bankers’ fault, which is a convenient, simple and a rather tired notion. A takeaway here is that if one is greedy and wears a suit he’s evil, but if one is greedy but is a barefoot, unshaven, drum-playing oddball then it’s ok. It’s as if we’re steered away from pondering on what’s wrong with the entire system.

Furthermore, movies of that sort usually have some redemption in the end. There’s no redemption here. Screenwriters want us to be angry. Well, that goal was achieved. A layman will come out of that movie angry at the suits – the S&P, SEC, the bankers, but not the outsider financial cowboys. But that doesn’t absolve one from making a moral judgement. I think a movie, especially a movie exposing such spectacular misdeeds, has to carry a moral message, and this one fails to do that. What’s our takeaway? That the only recourse we have towards greedy bankers are even greedier and shrewder hedge funders, whom, after the dust settles, we will be asked to celebrate, simply because they exposed the fraud? But it is the very process of exposition, like in quantum mechanics, that made the experiment have an outcome that otherwise, without that exposition, would be very different – limited and less severe in scope. Without them, the betting process would stop at the very first level – the level that Selena Gomez played at the Blackjack table. There would be no second or third order of betting, there would be no CDOs and CDO^2. But they – the hedge funders, the shorts – opened the floodgate of a shit lake that otherwise would be contained. They are the observers of a quantum experiment that without their actions would have a very different, less severe outcome.

We are given a lot of shocking information and then left to make our own judgements. For the industry (Hollywood) that likes to give us sermons in easily digestible tidbits this is puzzling. The narrative is good at building up outrage but then, as we are shaking in our seats with rage, it stops short of making a coherent conclusion, as if the screenwriters and Michael Lewis were afraid to make a judgment after every appalling detail that they’ve given us. As such it’s just another good ol boys’ heist movie, masquerading as social commentary. The only moment in the whole movie where they come close to the truth is when an S&P executive played by Melissa Leo, herself a corrupt player, tells Steve Carell that his positions make him a hypocrite. That’s about it.

I’d like to conclude with a quote from Yves Smith’s recent blogpost, (which is a must read, btw):

“Lewis’ desire to satisfy his fan base’s craving for good guys led him to miss the most important story of our age: how a small number of operators used a nexus of astonishing leverage and camouflaged risk to bring the world financial system to its knees and miraculously walked away with their winnings. These players are not the ugly ducklings of Lewis’ fairy tale; they are merely ugly. Whether for his own profit or by accident, Lewis has denied the public the truth.”

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