G K Chesterton once said that the ultimate test of a Catholic was to visit Rome and remain in the faith. You might say that about a capitalist going to Las Vegas – or watching The Big Short. Las Vegas is the ultimate temple to greed and emptiness. It is therefore only right that this film reaches a kind of climax in Las Vegas. The film, following the book of the same name by Michael Lewis, is as full a diagnosis of the cancer in capitalism as you could find. It is also as good a movie as I have seen for a long time.
Banking is not hard. The bank takes money from me and pays me the cost to them of X %, and then lends that money on to you for a price for them of X +Y% and trousers the Y% difference in the two rates of return. The only way the bank can lose is if you default on the loan. That loan will be secured by a mortgage. The effect of a mortgage is that the bank can sell your home if you don’t repay the money.
There are therefore two ways the bank can get it wrong. It can lend you more than you can afford and put you in a position where you may well default if there is some change in your fortune. Then if you do default, and the housing market has gone down, and the bank has lent too much to you, it may not recover its money at all.
This is at the bottom what happened with the failure of the mortgage market in the US in 2007 that led to the Great Financial Crisis. It was compounded because very clever people in the finance industry and bond markets – all known in America as Wall Street – bundled up all of these mortgages in fancy sounding documents and securities that hardly anyone ever bothered to read or try to understand and then sold rights to the returns on the mortgages as bonds. The bonds of course were only as good as the underlying mortgages – no matter how complex the eventual layers on the cake became, the whole structure turned on the capacity of the original borrowers to repay the loan, or of their secured property to make good any default. If interest rates went up, and the property market went down – and those two events commonly occur together – then the house of cards would all fall down. That is what happened in what we call the ‘sub-prime’ mortgage debacle that brought the financial world to its knees.
(As it happened, I had to look at most of this a long time ago when acting for the government after Pyramid failed – some silly people (including one Supreme Court judge) suggested that the government may have been at fault!)
This all happened because people who were negotiating the original mortgages and then tying them up to sell them on were being paid so much by way of commission that they lost any interest at all in the worth of their transactions and simply kept churning out the mortgages and all the subsequent bonds in order to get their own commission and irrespective of the consequences.
There is only one other thing you need to remember when looking at the failure of Wall Street that led to the GFC – there is one born every minute. Most people lose their brains if you wave enough dollars in front of their face. And Wall Street lives off feeding that greed and stupidity.
You need only to see that greed and a kind of moral emptiness drove these deals at both ends – those selling the mortgages or bonds got paid too much; those taking them paid too much for what they thought was cheap money. At both ends, people were getting money that they had not earned. The people we feel sorry for are those at the bottom who were conned into transactions they could not afford. People should be jailed for inflicting this kind of misery. It is daylight robbery.
How did it all work at the top end? The big hitters see every deal – or ‘trade’ – as a gamble or bet. Most people buy shares or bonds in the belief and hope that they will go up in value. This is called going long. But what if you think that a security – say, a share, bond, or even mortgage – will go down in value? How do you profit on that movement if it happens? What ‘trade’ can you do to give effect to the bet you want to make? One way is to enter into a deal where you sell a security before you buy it. If you agree to sell now at a current market price of $X on the basis that you will deliver in the future, and when that time comes the market price has dropped or crashed to $X-Y, you win – you trouser the $Y.
This is called going short, or short selling, or simply ‘shorting’. Hence the title of the book and film. The practice is legal and some say useful in serving to keep market values real. Slater & Gordon may have a different view – their shares have been shorted by dealers who talk the stock down to fulfil their own prophecies and trades. People tend to go long in a rising or bull market and short in a falling or bear market.
And if you have won your bet, someone has lost theirs. And if they take a big enough hit, they might fail and go out of business. If this happens to a lot of them, the whole economy might be threatened. A bet against a number of banks if they are big enough may be a bet against the economy of the United States – if not the world. And although any investment is a kind of gamble, shorting is not for mum and dad. If the bet of the short comes off, the other party takes a real loss – and not just a foregone possible profit if they have sold before a price rise. But if the bet fails, and the price goes up, the capacity for loss for the short seller may be unlimited.
That is all you need to know when you go to see The Big Short. And the world owes Michael Lewis a great debt for the books that he has written about Wall Street. He has on a number of occasions now lifted the lid clean off a stinking cesspit. He has now got the status of Bob Woodward – people listen to him, and you choose not to speak to him at your own risk. I read the book with a lot of interest, but at times it lost me. This film never did. I think it is a brilliant film that should be seen by anyone who has any interest in the fragile way our moral world is structured.
The main charm of the film is that although it deals with an industry run for the most part by outright crooks, the people in it have an interest if not a charm of their own. The most important part of the film is that the idea of the big short was put in place by a man who did what no one else bothered to do. He actually looked at the mortgages and the properties that they secured, and the lenders who took the mortgages, and concluded that they had to fail. This man looked hard at the security and saw it that it was bad. A dealer in securities actually looked at the securities! The loans were doomed to fail. This dealer could therefore bet against them and the deals done on top of them. This man is a cranky but brilliant former doctor. He lives with music blaring in his earphones and playing the drums. There are people out there like this who are quite brilliant in their own way, but who are utterly unable to carry on a decent conversation.
So, he is the man who first discovers that the house of cards may come down. By accident, this information falls into the hands of a real Wall Streeter who unusually has a social conscience, and who wants to stick it right up the big banks on Wall Street, even though his little hedge fund his effectively owned by one of them. He is the man who worried his rabbi by finding inconsistencies in the word of God when he was a boy. (His mother asked the rabbi whether he had found any.) We first see him coming late into a group therapy session and hijacking it and then bitterly resenting the suggestion that he has done so. He is a wonderful character that is beautifully developed and played. He, rather than the mad doctor, is the man at the heart of the film. (My recollection is that the man in the book is not likeable at all.)
The other two main characters are young whiz kids starting a business out of a garage. There is a hilarious scene where they go to one of the big banks to try to get some ticket that will have them ‘to sit at the table’ as they say, and they get wiped off like a dirty bum. The kids get a disaffected dealer to get them in and out of the big market. These three bring a sense of fun and innocence – at least they are sane.
And so it all goes on, and it all comes to pass, and the balloon goes up, and the banks go down. And we, the public, bail them out, and cop the bill.
It is a very, very funny movie and you worry for a while that you are laughing at events that will lead to untold human misery. But the film deals with this in a way that works dramatically. The human element is there, and so is the fact that the crooks have just walked away. The film said that one person went to jail. I cannot recall that, but what the film makes crystal clear is that the US should have had to set up a penal colony to deal with all of those shysters who robbed ordinary people.
There are two levels of robbery revealed in in the film. One is those at the higher level of the banks who just rip off anyone in sight, including the bank’s own customers, and its own shareholders. The other is the people down the bottom who are defrauding members of the public who blindly sign their life away. There is a hideous scene where mortgage brokers are boasting about the way that they clip migrants and people of colour. The hedge fund manager who is the hero interrupts the discussion to take his colleagues outside and ask them why these idiots are confessing. The answer is they are not confessing – they are bragging.
And the film gives it to the ratings agencies with both barrels. Standard & Poore are represented by a woman who looks blind. She is – but not physically. This is brilliant theatre. These bastards – and that is the polite term – gave glowing endorsements to liars and thieves who paid them to do so. It is a very sad comment on American justice that these crooks have not been brought to justice – even in civil actions.
The central message of the book was that those driving this world-threatening farce were utterly amoral. They could not spell the word ‘conscience’, and we have no reason to believe that anything has changed. Clever crooks still skin greedy idiots. They are not just too big to fail – they are too big to be reined in. Their corruption now looks endemic, just as violence in the US is rooted in the gun laws and their way of life. There will be more regulation, but this just makes the dealers more careful and soulless – liked doped cyclists. You cannot, after all, legislate away greed and inanity.
Inequality will be the issue of our time – inequality in income and wealth, and in the justice system. These shysters keep getting away with it at both ends, and history suggests that the victims will eventually erupt unless there is a real change.
The film has what may be called an ensemble cast including Ryan Gosling, Christian Bale, Steve Carrell, and Brad Pitt. It was written and directed by Adam McKay. They all show complete assurance. One character is like a Greek chorus who offers asides to the audience – that I think is a mark of this film as high theatre.
This is a very important story and I find it very hard to imagine it being better told. It is also I think a tribute to the U S that they can tell such a dark story so well and so frankly. God only knows that the U S can deal with some tribute just now.