EppsNet at the Movies: The Big Short

My connection with the events depicted in The Big Short is that I worked in the information technology department of a mortgage bank in the run-up to the 2007 implosion of the subprime mortgage market. Many of the big players in that market, like New Century and Countrywide, were based here in my backyard — in Orange County and Pasadena.

Given that it was fairly evident at the time that complicated financial instruments were being dreamed up for the sole purpose of lending money to people who could never repay it, it’s remarkable that very few people foresaw the catastrophe and that even fewer actually had the nerve to bet on it to happen.

Long story short, the major rating agencies — Standard and Poor’s and Moody’s — were incompetent in their rating of subprime mortgage bonds, giving investment-grade and, in some cases, triple-A ratings to high-risk instruments. A lot of people took the ratings — which implied that subprime mortgage derivatives were no riskier than U.S. Treasury bonds — at face value and acted accordingly.

As someone said at the time:

What is amazing is not just that people are greedy and prone to engage in ethically questionable activities; the big lesson is how people can reach unimaginable positions of power and essentially be (a) incompetent, and (b) not willing to do even the most mundane and trivial parts of their job.

The only less-than-positive thing I can say about the movie is that the Christian Bale and Steve Carrell characters are so compelling that when neither of them is on screen and you’ve got either Brad Pitt or Ryan Gosling — nothing against them personally but their characters aren’t interesting — the momentum flags.

The director is Adam McKay, best known as the director of a bunch of unfunny Will Ferrell movies (yes, that’s redundant), including Step Brothers, which Roger Ebert described as “a sign of the end of Western civilization.” How he was offered this movie I do not know but he does a capable job.

A couple of important points that I think were brought out better in Michael Lewis’s book:

1. Almost no one believed that the subprime mortgage market could collapse because the collapse of the subprime mortgage market would be a global catastrophe, and nothing that bad could ever actually happen.
2. A handful of people got rich betting against the mortgage market. The CEOs of every major Wall Street firm, on the other hand, were on the wrong end of the gamble. All of them either ran their public corporations into bankruptcy or were bailed out by the United States taxpayer. But the CEOs all got rich too. Companies died, people lost their jobs, their homes (I lost my job but not my home), their savings, their pensions . . . but the CEOs got rich.

What are the odds that people will make smart decisions about money if they can get rich making dumb decisions?

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