Big Short – Movie Review (with additional info from the book & google)


Disclaimer: This movie review is lengthier than usual and includes some additional information that I gathered in the course of my research.

Based on Michael Lewis’s bestselling nonfiction book, Adam McKay’s “The Big Short” focuses on the financial crises of 2008.  This was a cataclysmic event that eventually impacted people and economies, worldwide, threatened the collapse of large financial institutions, prevently only by the government bailout of the banks, led to huge tumble in worldwide stock markets, to the bursting of the US housing bubble, to failure of multitude of businesses, resulted in declines in consumer wealth in trillions of US dollars, and led to a global recession that contributed to the European debt crisis.  

The story of this financial crisis has  been explored by Hollywood from various perspectives, in films and documentaries (“Inside Job”, “Margin Call”, “The Wolf of Wall Street”).  This poorly understood event has raised as many questions as the attempts at explanation that are offered in films and documentaries and explanations are offered from various political angles and financial perspectives.  Some of the questions that must have come up are, “there must be someone, perhaps a few people who knew what was going on, what were their reactions and how did they know what they did”?  

The film focuses on a handful of these folks who saw what the big banks, media and the government refused to, and then played the cards carefully to win the game.  Michael Burry (Christian Bale), American Hedge Fund Manager and Founder of Scion Capital, with his glass eye and penchant for number crunching, went line by line through thousands of individual mortgages that make up the securities underwritten by the banks, and realized that escalating number of subprime home loans, spelled a looming disaster.  Just to put it in perspective, every single mortgage bond is accompanied by over a hundred page prospectus, with details and fine prints, the type that most of us gloss over.  Burry spent hours scanning and reading many of these.  

Burry also realized that the verbiage existed to dupe non savvy investors and to enable lenders to extend easy credit.  For instance, a bond backed entirely by subprime mortgages was called ABS or asset backed security and when anyone dug deeper to find what assets backed these mortgages, they encountered further acronyms.  The market was so bullish that the lenders were loosening the lending standards or inventing new ways to lend, in order to grow loan volumes.  But there was no way to short sell houses and other routes were long and circuitous.  Burry then discovered credit default swaps, in which the downside was defined and certain and the upside can be in many multitudes.  He then put in a billion plus dollars of his investors’ money into credit default swaps, effectively betting against the rosy and bullish housing market.  

Burry did not just pick any subprime bonds to bet against.  He picked the worst ones, sure to go bad.  He did detailed credit analysis (supposedly what the bankers do) and analyzed loan to value ratios of home loans, second liens on these homes, location of the homes, absence of loan documentation and proof of income of the borrower and other factors that indicate that the loan would go bad.  

Burry also carefully selected the firms.  If the housing market crashed as he predicted, then he needed to make sure he’d bought insurance from banks that did not go immediately out of business, rendering his insurance valueless.  He ruled out Bear Stearns and Lehman Brothers and found that while he had done his homework to carefully pick the bonds, the bankers were least concerned as to which bonds he picked to bet against.  There were some terrible mortgage pools including where the borrowers had the option of not paying any interest at all and can accumulate bigger and bigger debts.  These were sure to default and yet banks sold insurance on them at the same rate as any other mortgage bonds.

Spurred by Burry’s insane investments, Jared Vennett (Ryan Gosling) (whose character is based on Greg Lippman, a Deutsche Bank trader), along with Mark Baum (Steve Carell) (based on real life Steve Eisman) also sprung into action.  And so did the smallish investment team of Charles Geller (John Magaro) and Jamie Shipley (Finn Wittrock), who took their case to a former banker Ben Rickert (Brad Pitt), based on Ben Hockett, a partner at Cornwall Capital partners, to help them get a seat at the big investors’ table.  This small group of savvy investors were all betting against the bullish housing market.  

These were not just savvy investors imagining themselves getting rich off a looming fiscal catastrophe, but they spent the midnight oil, crunched their numbers, painstakingly and line by line went through fiscal reports, and questioned every contradiction.  That is not all.  They traveled, went into the trenches, and talked with people who made up subprime lenders, underwriters, and borrowers, in subprime heavy markets.

Finally, as the collapse was imminent, banks began calling Mike Burry to buy back, at “generous terms” the credit default swaps they had sold him.  By July 2007, crappy mortgages worth nearly $400 billion were resetting from their teaser rates to new, higher rates.  By June 2008, while the S&P 500 returned a gain of around 2%, any investor who had stuck with Scion Capital from its beginning in 2000, had a gain for nearly 490%.  The gross gain of the fund had been an unprecedented 726%.

This is the beauty of this movie.  It is not just showing one smart explanation versus another or few smart investors versus others who were not willing to go against or even listen to contrary indications.  It is showing the “how”.  As the movie educates viewers on simple to complex financial concepts like CDOs, subprime loans, and synthetic collateralized debt obligation, the film shows the willingness of these men in pinstripe suits to march down to the trenches to understand the situation from up close and personal angle.  

In the end, one only wonders why the number crunching geniuses with Ivy League MBAs and other pedigreed credentials to their name, sitting in fancy offices in glass towers, in major metropolitan cities, took the easy route to quick riches, while risking so much of other people’s money that was trusted into their hands and why no one went to jail for it.  
But then again this film and the work of these small group of people fascinatingly demonstrates the challenges of finding the information buried deep in complex jargon.  The finance industry’s predatory practices, sometimes not just thrive on confounding jargon and deliberately keeping ordinary people in the dark, but sometimes they rest on the industry itself ignoring the facts and enjoy the good while the going is good.  I hope we can take the good lessons for future, from this event.  I rate this movie 4.7 on a scale of 1 to 5, with 5 being excellent.  



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