The Big Short – Enlightened & Frustrated

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We’re big movie fans around here… see our Star Wars Infographic, Top Investing Movies, or review of market-related movies such as Cancel Crash or The Wolf of Wall Street for proof of that.

So it’s no surprise we navigated the Star Wars lines to get out and see the latest investing/economy/market related movie – the Big Short. If you’re looking for an over the top Wall Street movie filled with drugs, parties, and irresponsible behavior, this isn’t the movie you’ll enjoy. Actually, scratch the last one… it’s full of irresponsible behavior, just not on the scale we’re used to seeing in movies. From the main characters to the big banks, from the credit rating agencies to people that used their dogs name on mortgage applications – there’s plenty of irresponsible behavior to go around in this one.

The Big Short (based on the book written by Michael Lewis) takes on some of the most complex and mind-numbing details of the 2007-2008 housing bubble / financial crisis, breaking them down into something anyone could understand through the lens of edutainment. For example, as a way to explain Credit Default Swaps and Synthetic CDOs – they enlist Selena Gomez and Behavioral Economist Richard Thaler to play out a scene of blackjack where observers make bets on whether or not Selena was going to win her hand.

The Big Short Characters

The all-star cast (Steve Carell, Brad Bitt, and Ryan Gosling) tell the story of how a group of separate individuals made billions of dollars betting against mortgage backed securities – or more simply – betting against the housing market.

One of the most interesting aspects of the movie is that these characters all came to their own individual conclusions about the housing bubble, with no idea each other existed and were looking to profit from the same thing while everyone else was oblivious. They saw that housing prices were soaring, no money down mortgages were being approved without income verification, all while Wall Street was packaging them into mortgage backed securities (groups of mortgages) stamped with high credit ratings.  What could go wrong?

Mark Baum (played by Steve Carell) is a cynic hedge fund manager that literally stumbles onto this information from a conference call that was a wrong number. Meanwhile, quirky, Michael Burry M.D. (played by Christian Bale) finds out about these bad mortgages when he takes the time to look at all the mortgages inside of some mortgage backed securities. Then there are two hedge fund managers Jamie Shipley and Charlie Geller (played by Finn Wittrock and John Magaro) out in Colorado that figure it out with the help of retired trader (played by Brad Pitt).  As an aside, could Brad Pitt have landed Angelina with that haircut?

The movie spares no light hearted moments to drill its point across in what seems more like unnerving documentary than a popcorn flick. There’s a scene where Shipley and Geller’s characters start dancing in public and Pitt’s character stops them to bring reality to the fact that winning means that millions of people will lose homes, jobs, and life-savings. Unlike typical Wall Street movies filled with parties and dancing and little time spent on the victims, when these group of individuals win, there’s every day Americans losing. In this sense, the lines of good vs. evil are incredibly blurred. We say this, because throughout the movie — if you find yourself rooting for the protagonists, you find yourself rooting against Americans being able to pay their bills on time. If you find yourself wanting the protagonist to lose, you accept the fact that you’re okay with the big banks, the SEC, the credit agencies, and some would argue the Fed (although not mentioned in the movie) getting away with playing fast and loose with the lives of those completely oblivious.

The movie places a heavy amount of blame on big banks, credit rating agencies, and the mortgage process, while leaving out the role the Federal Reserve might have played in the process, something the Wall Street Journal chronicles concisely:

But it never answers the bigger question: how the bubble, and the belief it would never collapse, formed. The reason lies in broader macroeconomic and societal forces that are barely mentioned: low interest rates engineered by the Fed after the Nasdaq bubble’s collapse; the glut of foreign savings from China and elsewhere pouring into the U.S. bond market; the complacency nurtured by years of economic calm; the financial innovations—well beyond mortgages—and lax regulatory standards bred by that calm. These forces were global: Many countries had housing bubbles and bank bailouts.

One of the lingering questions left from the movie is why someone wasn’t held accountable. Those traders? The Big Banks? The entire mortgage process? Steve Carell’s character (Mark Baum) seems to think that the big banks knew this was going to happen, but they didn’t care because they knew the federal government would bail them out. We won’t go that far… because honestly there’s no true way of knowing that information, and of course Angelo Mozillo of Countrywide did go to jail and the banks did pony up billions of dollars in fines and settlements and all of the rest for their part, but the monies made before and during (remember the banks were given bailouts and allowed to profit from those) help reduce the sting of those outlays.

One big winner left out of the movie – which profited from the financial crisis without any of the drama outlined in the book and movie – systematic Global Macro and Managed Futures strategies. When you see all that went into crafting the thesis that the housing market was about to crash, the research and insight needed to know the credit ratings were bogus and the mortgage approval process essentially fraudulent, a systematic approach sure seems a whole lot easier. Systematic alternative investments which don’t rely on a growing economy or rising stock market are dynamic strategies which react to the consequence of all of the mess outlined in  the movie. They don’t need to know why it is happening – they just need to identify that it is happening, positioning their bets to profit from falling currency, bond, commodity, and stock index markets.

Anyone want to make the sequel – The Big (Systematic) Short – highlighting the boring days leading up to new signals in short us stock indices, short crude oil, short copper and all the rest;  and the non-eventful hours when the teams at systematic managers watched their computers print out the next day’s orders and entered the orders with pre-determined risk points like every other day of their careers. We’d go with Jim Broadbent as David Harding.

Harding Broadbent

We won’t hold out breath waiting for the systematic version. In the meantime, the discretionary version out in theaters now provides the best explanation of the financial crisis to date, but at the cost of leaving you feeling helpless that no one was held accountable. The best thing to do is take some time to see the movie and decide for yourself.


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