What the great short film is right – and wrong – about the financial crisis

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The global financial crisis has inspired hundreds of books, but only a handful of films. It is difficult to make mortgages telegenic.

The big courtHope to change that. Based on the Michael Lewis bestseller of the same name, it tells the story of a handful of traders who made their fortunes betting against mortgages behind the real estate bubble.

Director Adam McKay is best known for his comedies. “The Other Guys,” a 2010 action comedy he directed that revolves around financial fraud, piqued his interest in finance and led him to Mr. Lewis’s books. When he landed “The Big Short,” he delved into books and articles about the crisis and visited a bond trading company.

“I think there is a huge gap between professionals and experts, and ordinary people” when it comes to finance, he says. “Ordinary people feel too stupid or banking is boring.”

His film greatly contributes to reducing this gap. Viewers receive an entertaining lesson in the financial engineering behind the mortgage bubble, such as the construction of mortgage-backed securities and their vulnerability to default.

But it is an incomplete picture. By focusing so intensely on mortgage financing, “The Big Short” underestimates the more complex economic forces that produced the bubble and intensified the crisis. By throwing most of the blame on the venality of Wall Street, he brushes aside the less nefarious but more compelling reasons why so many people on Wall Street and outside did not see it coming.

The film, which opens in limited theaters on December 11 and more broadly on December 23, begins by describing how, in the 1970s, Salomon Brothers’ Lewis Ranieri began turning mortgages into mortgage-backed securities. . The MBS was “simple and precious,” but it “turned into a monstrosity that collapsed the global economy,” says trader Jared Vennett, a fictitious version of

German Bank

DB 1.73%

trader Greg Lippmann played by Ryan Gosling.

By the 2000s, billions of dollars in subprime bad credit loans to clients with low credit scores, no verified income and low “teaser” rates that adjusted upward after just a few years were consolidated into MBS. In 2005, a handful of traders who looked at mortgages and the actual homes backing the securities concluded that they were much more likely to default than the triple-A ratings involved. They have therefore developed tools to bet against them – that is to say “shorting”.

There is a lot of dry finance at work, which is why it has been ignored for so long. Mr McKay finds clever ways to explain it: Actress Margot Robbie in a bubble bath explains why banks have started filling MBS with riskier mortgages. Mr. Vennett explains how the titles are “sliced” with a tower of Jenga toy blocks.

If there was an Oscar for Best Dramatization of a Derivative, it would surely go to behavioral economist Richard Thaler and singer Selena Gomez, playing themselves, at a blackjack table. The crowd bets on Gomez’s hand, then the other’s bets. It’s like a “synthetic CDO” – a derivative priced on complex mortgage-backed securities that itself do not contain mortgages.

A central question hovering over the film is what motivated the Wall Street establishment that traders bet against: stupidity or crime? Mr Vennett says, “Tell me the difference between stupid and legal and I will have my wife’s brother arrested.”

The film, in the end, takes sides with crime. Mr McKay says some bankers were clearly stupid, but that’s no excuse. “Tony Soprano’s model is not a good business model. He’s stupid. But he’s a criminal.

Such moral clarity will resonate with a public still sickened by the bailouts of the time of the crisis. But it’s also simplistic.

The idea that mortgage industry insiders have consistently profited from selling mortgages that they knew would fail is contrary to what actually happened. A 2012 article by three Federal Reserve economists noted insiders such as Bear Stearns and its leaders had their fortunes and businesses tied up in the mortgage market. It was their losses “which nearly brought down the financial system at the end of 2008.” It was strangers, such as hedge fund manager Michael Burry (played in the film by Christian Bale) and John Paulson, another un-profiled hedge fund manager in “The Big Short,” who made a kill.

Trader Mark Baum (played by Steve Carell) concludes that the banks knew what they were doing but assumed they would be bailed out. It’s a strange sort of logic: which bank would knowingly apply for a bailout, in which case shareholders are often largely wiped out and management fired?

In fact, as the Fed Journal notes, insiders took such exposure because they believed, like most homebuyers, that house prices would never go down. This is also the reason why underwriting standards collapsed: proof of income didn’t matter if the loan could still be repaid by selling the appreciated collateral.

The film sometimes nods. “No one can see a bubble,” an investor tells Burry. “That’s what makes it a bubble.”

But that never answers the bigger question: how the bubble, and the belief that it would never collapse, formed. The reason lies in broader macroeconomic and societal forces that are barely mentioned: low interest rates designed by the Fed after the collapse of the Nasdaq bubble; the glut of foreign savings from China and elsewhere into the US bond market; complacency fueled by years of economic calm; financial innovations – well beyond mortgages – and lax regulatory standards engendered by this calm. These forces were global: many countries experienced real estate bubbles and bank bailouts.

Maybe no movie could do all of these questions justice. There is “only so much you can do” in a two-hour movie, says McKay. “I would love to see this film kick-start the conversation about economics and finance, collapse and regulation, and make people a little less intimidated by the subject.”

Corrections and amplifications:
Margot Robbie is an actress. An earlier version of this article misidentified it.

Write to Greg Ip at [email protected]

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