Short-circuiting capitalism

The Big Short

Written and directed by Adam McKay

From the book by Michael Lewis

Reviewed by Manny Thain

How do you make a film about financial crisis funny and witty, without dumbing down, while ratcheting up the suspense, even though everyone watching knows the outcome? Check out The Big Short to find out. Yes, the story is familiar: how the huge property bubble burst in the US, blowing apart the world’s financial system in 2007 and leading to the great recession. A colossal debt mountain had been built up on the shaky foundations of subprime mortgages. These dodgy loans to working-class people who could not keep up with their payments were packaged up and sold on the financial markets.

The film skilfully mixes dramatised scenes with inventive exposition. It shows graphically the hubris, greed and arrogance of a financial system completely out of control. Unaccountable. Untouchable. Amoral.

It charts the course of a few groups of hedge fund managers and dealers as they become aware of the existence and extent of the bubble and proceed to short the housing market. Shorting is a way of profiting from a fall in the price of shares, bonds, etc. In other words, they bet that the bubble would burst. It was a risky endeavour. They were betting against packaged mortgages, when housing was considered to be the mainstay of the US economy, given top ratings by agencies such as Standard & Poor’s and Moody’s, backed by the Federal Reserve Bank and the government of the United States.

First up is Michael Burry (played by Christian Bale), an unconventional but highly successful hedge fund manager. He hits on the fact that the housing market is based on huge amounts of subprime loans, and predicts a collapse in the second quarter of 2007. He also realises that money can be made by betting against the housing market. So, he creates credit default swaps – the mechanism by which he can short the market. In a series of draw-dropping scenes, Burry touts these swaps to leading Wall Street players, such as Lehman Brothers, Deutsche Bank, Countrywide, Bear Stearns, etc. They happily take his bet, convinced that the housing market is secure. In fact, they think he is completely bonkers: "This is Wall Street. If you offer us free money, we’re going to take it".

Jared Vennet (Ryan Gosling) is a brash bond salesman who hears of Burry’s activities in a bar full of loud, hedonistic financial wide-boys. He links up with Mark Baum (Steve Carell), another hedge fund manager. These two performances are excellent. Vennet is a completely obnoxious character, out to make piles of cash in any way he can. Baum is the outsider on the inside, railing at the very system he is part of. The mortgage market scam is explained. How collateralised debt obligations (CDOs) are used to package up AAA rated mortgages with subprimes, effectively hiding these risky loans – and masking the danger of collapse: "They’re dog shit wrapped in cat shit".

Before committing to the scheme, Baum and his team set out to find out whether there really is a bubble. They go to Miami to investigate the housing boom. Two brokers gleefully reveal how they are raking it in and living it up on the basis of subprime mortgages. Credit worthiness is not being checked – and they don’t care. "Why are they confessing?" Baum asks. "They’re not confessing. They’re bragging". It sums up the prevalent mood.

They visit properties which are months behind in payments. Answering the door, a tenant asks why they want to talk to the owner’s dog – in whose name the mortgage has been taken out! The tenant has been paying his rent, but the mortgage has not been paid. He is understandably worried: "I’ve just got my kid into school". The Big Short does that. Just as you get sucked into the machinations, the deal detail, the colossal scale of the fraud and cynical manipulation, and just as you start enjoying the humour, it bites back, reminding you of the consequences of this financial crisis – in lost jobs, homes, even lives.

Appropriately enough, in Las Vegas, the gambling capital of the USA, Baum’s team discovers the existence of synthetic CDOs. These are explained very simply. If a basketball player is scoring with each shot, people will bet that s/he will score with the next shot, and so on. Of course, the player could miss at any time. The synthetic CDO follows the same mentality. It is essentially a side bet that the CDO will continue to perform well – a bet that the gamble that the basketball player will keep scoring will be correct. It introduces a new layer of (fictitious) capital. A manager talks of a CDO priced at $50 million generating $1 billion – and the huge bubble gets 20 times bigger!

No-one in the system seems to know what is going on and, as long as they are making obscene amounts of money, it does not pay them to even look. Everyone is implicated. The Securities and Exchange Commission, which is supposed to regulate the financial sector in the US, has given up on investigating. The financial press turns its back on the story. It is a perfect storm. Baum and his team are outraged at what they find. And it seems that the Baum character always tried to expose double-dealing in the system. Nonetheless, he ends up making millions from the big short – and making him a hypocrite.

Meanwhile, Burry winds up his hedge fund, the subprime crisis shattering his faith in the system. You have to ask what took him so long. The subprime excesses were just one part of the untrammelled deregulated financial system, championed by the Reagan/Thatcher axis, then unleashed ferociously on the world from the early 1990s – a devastating economic consequence of the collapse of Stalinism. Burry’s hedge fund made nearly $30 billion!

This is a remarkable film, getting across quite complicated issues in a very entertaining way. At two hours and ten minutes, it does feel a bit long – shaving off 15 minutes or so would have been a plus. But it is very good nonetheless. It will make you laugh and it will make you rage. It lays bare the completely rotten financial system, a vital part of greed-fuelled, profit-driven capitalism. Only one middle-ranking trader was jailed for bringing the world economy to its knees. For throwing out of work hundreds of thousands of people. For throwing hundreds of thousands of people onto the streets. For the suicides, family breakups, depression and illnesses of hundreds of thousands more. The banks were bailed out.

The economic collapse was not a major surprise to readers of Socialism Today. In December 2006, we wrote: "The housing market is different from the stock market. While shares are liable to crash suddenly, housing tends to decline more slowly... Nevertheless, all the signs are that housing has entered a serious recession, and is far from having reached the bottom. Even a ‘soft landing’ for housing will depress consumer spending and might well push the whole US economy into recession". (Lynn Walsh, US Economy: Heading for Recession?, Socialism Today, No.106) Subsequent issues of the magazine examined in more detail the causes of the financial crash and its global consequences throughout 2007 and 2008.