January 07, 2016
In 2008, two big Wall Street firms, or companies that trade money and investments, collapsed.
The U.S. economy plunged into “the Great Recession.” That meant the economy was weak and many people lost money. It was the worst financial downturn since the 1930s.
In the U.S. alone, 8 million people lost their jobs. Six million people lost their homes. And trillions of dollars in consumer wealth was lost.
The financial crisis spread globally. From 2008 to 2012, economies around the world slowed. Unemployment rose. Stock markets fell, and international trade declined.
But how did all this happen?
Michael Lewis, the best-selling author of several books about Wall Street, explains how the financial crisis came about in a book called “The Big Short.” The New York Times calls it “one of the best business books of the past two decades.”
In finance, “to short” an investment means to bet that it will go down in value. There is a person on the other side of the trade who bets that the investment will go up in value.
“The Big Short” tells the story of four outsiders in the world of high finance who predict the credit and housing bubble collapse before anyone else does. They “short” the securities involved in the bubble and end up making a great fortune.
“The Big Short” has been made into a new movie by Adam McKay. It features outstanding performances by Academy Award-winning actors Christian Bale, Brad Pitt, Melissa Leo and Marisa Tomei.
The film points out that banking used to be a boring industry in the 1970s. But then in the early 1990s, Lewie Ranieri, a Wall Street banker, created what are called “mortgage-backed securities” (MBS).
Wall Street firms put thousands of home mortgages into one basket of securities and sold them to investors and banks.
These were considered safe investments, since homeowners historically had rarely failed to pay back their home loans. But the mortgage bankers lent money to people who weren’t financially sound enough to buy a house. So more and more risky mortgages were put in that basket of securities.
Yet the rating agencies — who are supposed to be objective and ethical -- gave top ratings to these securities. And the regulators at the U.S. Securities and Exchange Commission (SEC) seemed unaware of the impending crisis.
“The Big Short” reveals the fraud of Wall Street firms, such as Bear Stearns and Lehman Brothers. It also shows the greed of the mortgage bankers and real estate industry. They were quick to offer loans to people without making sure they could pay them back.
The movie is fast-paced and riveting. It explores what made the central characters act the way they did. For example, Dr. Michael Burry, a hedge fund manager in San Jose, California, was one of the first to see the housing bubble and credit collapse.
Burry had a glass eye, which made him socially awkward and isolated from others. But because he felt like an outsider, he was comfortable challenging Wall Street about mortgage-backed securities.
Mark Baum, another central character in the film, lost his brother to suicide and was tortured by that loss. He also had a strong sense of moral outrage. He wanted to expose the truth about mortgage-backed securities.
The movie is brilliant at making complex concepts easy to understand. This is done with visual tools and by celebrities giving easy examples. For example, one scene shows Selena Gomez, the famous Latina singer and actress. She is shown gambling in Las Vegas with a crowd of fans surrounding her.
Gomez explains to the audience that some fans will bet that she will lose. Others will bet that she will win. The fans who bet correctly are like the people who successfully bet that mortgage-backed securities would fail. They made money when the securities collapsed.
In another scene, Anthony Bourdain, the well-known chef and television host, is shown cooking in the kitchen of a fancy restaurant. He takes three-day old fish, which has not sold, and throws it into a stew to sell to customers.
The customers do not know that they are getting fish that may be rotten. Bourdain says this is similar to what Wall Street did with risky mortgages as securities. They sold these securities to banks around the world, claiming they were fine products.
Vivid imagery makes the movie entertaining. But it also explains complex financial concepts.
The film closes on a serious note. In the wake of the debacle, the bankers who created the crisis were not punished. Instead, they received a huge bailout from the U.S. taxpayers. They used the money to pay themselves large bonuses. Only one of them went to jail.
And some Wall Street firms are still selling a product that is similar to a mortgage-backed security.
"The Big Short" tackles an important chapter in the history of global finance.
I’m Mary Gotschall.
Words in This Story
downturn – n. a situation in which something (such as business or economic activity) decreases or becomes worse — usually singular
outsider – n. a person who does not belong to or is not accepted as part of a particular group or organization
mortgage – n. a legal agreement in which a person borrows money to buy property (such as a house) and pays back the money over a period of years
security – n. a document showing that someone owns or has invested in a company, organization, etc.
objective – adj. based on facts rather than feelings or opinions
ethical – adj. following accepted rules of behavior : morally right and good
impending – adj. happening or likely to happen soon
fraud – n. the crime of using dishonest methods to take something valuable from another person
greed – n. a selfish desire to have more of something (especially money)
rivet – v. to attract and hold all of someone's attention
hedge fund – noun phrase a group of investors who take financial risks together in order to try to earn a lot of money
outrage – n. extreme anger : a strong feeling of unhappiness because of something bad, hurtful, or morally wrong
gamble – v. to play a game in which you can win or lose money or possessions : to bet money or other valuable things
debacle – n. a great disaster or complete failure
bailout – n. the act of saving or rescuing something (such as a business) from money problems
bonus – n. an extra amount of money that is given to an employee
tackle – v. to deal with (something difficult)