I don’t get out to movies often.  Growing up it is something to do in order to get out of the house, as an adult we become much more sensitive to mandated proximity to other humans, queue management, costs and the like, as such many of my adult friends and adults I’ve known for longer periods (adults being adults when yours truly was youth) rarely go to the movies.  It’s also easier to get youth excited about movies, due to the content being so new to them as well, but that’s another topic for another time.

This last weekend a group of friends and yours truly saw “The Big Short.”  It wasn’t a great movie in my estimation, but it was good.  The subject matter itself helped a good deal, as it is focused solely on the securitization of mortgages, their grading and subsequent abuse which led to the Great Recession in the US.  The reasons it isn’t great are the continual breaking of the fourth wall, particularly around explaining the story.  However the acting is largely well done and the character development was mostly thorough.

It has been seven years since this event devastated the economy.  It was the defining moment in my adult life from an economic perspective, more so than 9/11 or any other event.   The amount of people that lost jobs or worse was far more catastrophic than anything else happening in my lifetime.  The Big Short is a microcosm of the events leading up to the failure and restructuring within the banking industries as told through three separate but similar bond shorting scenarios.  Explaining the entirety of each of the stories is a huge undertaking, I’d advise seeing the movie if you want to get more detail.  Some thoughts on the project:

the-big-short-teaser-poster1.  As stated, this was a very important event in the US and thereby the world as it’s the economic engine affecting so many other markets.  However, as explained in the film, the work that it takes for laymen and women to understand the system of securities and financial tools utilized on Wall Street is a not likely to happen.  This is NOT due to the intellectual horsepower needed, it’s more a basic handle on lexicon than on math, but due to the efforts of the industry to prop up the concepts as difficult.  Many industries insulate themselves from others as professionals as a barrier to entry, mostly by necessity and not as an artificial construct, but the financial industry feels more forced.  The concepts are pretty basic, if you had an afternoon to walk through the time value of money and a vocabulary of financial instrument names, you’d be 80% of the way there.  The film takes special care to make this an offering for us serfs — explaining concepts using every day examples, which is a good idea overall despite some clumsy attempts at mixing financial concepts and entertaining writing.

2.  That unfamiliarity that the vast majority of the population has with Wall Street and the financial markets as a whole makes the entire mess very difficult to understand.  What really happened?  Why are people going to lose jobs?  What’s going to happen now?  Most people can’t answer the questions now — at the time these questions were MUCH more concerning and no easier to really explain.  Those that did understand what had happened were often dealing with agency issues, while the conflated nature of the financial industry and players within lends itself (forgive me) to a veritable who’s on first in regard to benefitting from such a fiasco.  From an outsider perspective, the events and explanations thereof are chaotic gobbledy goop with implications bordering on life threatening depending on your particulars.

3.   The protagonists of the film are wholly part of the goop, while the longer tenured of the groups shorting the housing market have a moral periscope that understand the impact of these shorts actually mean.  It’s important to note that shorting a stock or bond or any other instrument isn’t actually the catalyst that drives the asset downward.  Shorting a stock, much like buying a stock, is taking a position on the likely outcome of that vehicle and shouldn’t have a bearing on the underlying economic driver of the cash flow coming from the asset.  (Yikes, goop.)  Shorting the housing market doesn’t make housing less valuable.  People not paying their mortgages makes the housing market less valuable. Technically the markets where these types of things are sold are not rational and there is a very arduous explanation of how the markets acting irrational has real implications for the value of the underlying asset, but for the purposes of this film, shorting the housing market is not causing distress to the value of the mortgage securities.

The historical issue was that a lot of these mortgages that weren’t going to get paid due to adjustable rates inflating and people being unaware or indifferent to the prospect were based on bad information.  The bad information was perpetuated by Wall Street in the form of rating agencies, S&P/Moody’s, grading securities as valuable when they were actually bad investments.  People weren’t going to be able to pay their loans.  When the protagonists short the market, they are laughed at by the big banks because the housing market has been lauded as a long term fixture of our economy.  “Houses don’t get cheaper”, “People pay their mortgages”, etc.  They look foolish to short the market.  However when the bottom does fall out, the big banks scramble to unload their bad assets.  Their role in this situation is that of facilitator, creating contracts to short the market with a fee associated with the time to hold the security.  The value of this role is questionable.

4.  Agency issues are prevalent near everywhere you turn. Agency is the simple idea that you are an agent of an organization that pays you, but you are still looking out for number 1, i.e. yours truly.  There’s a point in the film where a CDO manager (goopy term for someone who packages and advocates for the sale of the securities comprised of the mortgages we’re discussing) knowingly understands the intrinsic nature of these bad loans and advocates for them as investments to his constituents despite technically being a steward for them.  He’s a heel, but he’s not an unrealistic one.  There are plenty of people out there simply selling whatever they can, knowing it is snake oil, but so long as their actions do not directly negatively impact their own outlook accept the practice.  Many would and should deplore those that don’t understand the markets while profiting.  This is unethical behavior.  An electrician would not belittle you for not knowing out to wire a house.  Financial managers shouldn’t either.  Bear in mind this is a dramatic effect and most people in the industry are good, but there are plenty of bad apples too.

5.  There’s a breaking point in the film where the cat is out of the bag regarding the securities and their being made of poor assets.  Yet the securities associated with the assets do not deflate as they should – the markets disregard the information temporarily.  This is an effort of market participants to delay losses and change their holdings and is absolutely fraudulent.  One of the protagonist groups goes to a media representative to break the story, but is met with unwillingness to comply.  Again agency issues are afoot.  The reporter refuses the prospect as the potential of the story to be a bust would have a large negative impact with his relationships that normally allow him to do his work.  If he was more certain of the story being true the situation would be different, the potential positive effect of breaking the story would alter the value structure for him.

This is an inherent risk reward scenario where there should not be one.  The reporter should simply report the news, not concern themselves with the stories’ impact to themselves.  But life doesn’t work this way.  Another situation pits two of the investors against a rating agency representative that points out how they lose business to their competitor if they do not comply with rating the securities backed by mortgages positively.  It’s very easy to take the high ground and point out that their job is to grade the securities as they should be, however if they do, they would eventually go out of business.  There may be other options in a situation like this, but in this instance, and what genuinely did happen, was people doing what they are told to do, “I just work here” after all. Society teaches our youth to act with moral character and do what is right in near every regard, yet our largest institutions are often fraught with situations that reward looking the other way, or punish doing the right thing–it’s an ugly truth. When every scenario is focused on garnering profit, and profit is a function of a zero sum currency economy, eventually someone loses.

6.   Brad Pitt does well here as a previous investor who has connections to help younger investors.  These younger investors are looking for “a seat at the big table,” to which he responds “pretty ugly table guys.”  He’s warning them that the industry is in itself dehumanizing.  The industry is so dehumanizing that he has gotten out of it and now spends his time gardening and doing less financial pursuits.  This is a very real ideal.  Working somewhere that props up the numeration and disregard of human beings and their livelihood will deteriorate those with strong morals. It will break them eventually.  And it is not an indication of weakness, it’s an indication of character.

7.  Two of the protagonists ask Brad Pitt’s character why they help them at the end of the film.  He states “You wanted to get rich, now you’re rich.”  This isn’t a great explanation of why he actually helped and could use a rewrite, but the bottom line is that the system itself is not going to change and the character realizes it.  Here’s the real issue though.  Those two characters asking the question had taken $110k and turned it into $31M in a relatively short timeframe prior in the movie.  They already were rich, by my standards.  By basically any rational person’s standards.  The big question of this film is when is enough, enough? The line blurs as systems scale.