Tuesday, 26 January 2016

The Big Short

I just watched The Big Short, the movie about the financial crisis of 2007-2008, brought about by the collapse of the sub-prime mortgage market in the USA. It's based on what really happened and derived from the Michael Lewis book, The Big Short: Inside the Doomsday Machine, so the characters in the movie are based upon real people. Its not really spoilers to describe any of this, although the movie does dig into some of the Teflon-coated dishonesty rampant in the system.

This was the 2005-2008 era of creating rebundled mortgages (collateralised debt obligations/CDOs) and their even more arcane derivatives (synthetic CDAs).

Hedge fund manager Michael Burry (Christian Bale) discovers that there's a time bomb in many US mortgages, when the interest rates change from the 'lure rate' to an ongoing rate at around three times as much, mainly clicking in during 2Q07. These mortgages have been bundled into packages generally labelled as Triple-A rated, despite their low quality (sub-prime) loan profiles.

He's not the only one on to this and a few other players also delve into the situation, which is more rotten than most could dream, based around a mix of greed and ignorance. There's also complicity from the regulators and later the government, which has to bail out the worst excesses to stop a complete crash of the US financial system.

I can understand that the subject matter might not be everyone's cup of tea, with all the financial lingo, but the movie makers recognised this too. From time to time we have little cutaway scenes like chef Anthony Bourdain explaining blended securitisation by comparison with seafood stew using three-day-old halibut and Margot Robbie drinking champagne in a bubblebath, explaining the CDO marketplace to the cinemagoers.

There's a strong mainly male cast in this 'boys in Wall Street' movie with Christian Bale, Steve Carell, Ryan Gosling and Brad Pitt among the players in what is a strong ensemble piece.

At one level its almost a caper story with the big short being the bet against the outcome (i.e. that the US property market will tank). It would be a caper except that the CDOs really happened and people were evicted from homes, lost jobs and billions were wiped out of real peoples' pension funds as a result.

Hardly any culpable bankers lost anything from this (although Bear Stearns and Lehman were toppled) although a Fed bail-out and quick Wall Street shuffle later and those that were out of jobs could just pop up again somewhere else.

Today we don't quite have the old-style CDOs, but the new emerging instrument is called a "bespoke tranche" opportunity. Yes, get ready for it to happen again.


OldLady Of The Hills said...

I watched this film and had a very hard time with the details of it. I hardly understood anything about what happened and found it appalling that some people made fortunes from other people's horrific losses.....For me, it is not a film I can say..."Oh, you must see this!" I admired the actors work but in truth, did not know who anyone was....! Not a good way to understand what actually happened, and why it happened. Just my opinion.

rashbre said...

HI Naomi I was also musing during this film that it was really dealing with a complicated form of swindle by the financial institutions. The scale of fraud by the banks was exceptional, and so were the attempt to cover it up when they hid the effects from the ratings agencies and so on. Because it is based upon what really happened it showed how the securitised debts fed back into the lives of real people. I worry that the losses from the underlying mis-selling are still resonating many years later, and that the banks are inventing replacements for the original CDOs.