The Big Short is a 2015 film based on Michael Lewis’ book The Big Short: Inside the Doomsday Machine. The film is directed by Adam McKay and stars Steve Carell, Ryan Gosling, Christian Bale and Brad Pitt.
What is The Big Short About?
The big short follows three storylines of financial opportunists who discovered and predicted the 2007 American housing bubble crash and decided to bet against it.
Dr. Mike Burry
Dr. Mike Burry (Christian Bale), a fund manager a Scion Capital looked into the mortgages behind the US housing market and found out that they are comprised majorly of unstable subprime loans. He approached large banks and proposed to create credit default swaps to allow him to short (bet against) the mortgage-backed securities. In return, he will pay premium monthly monthly premium to be able to buy these credit default swaps.
As Dr. Burry was the first to predict the market crash in 2005, his investments did not bear fruit until the 2nd quarter of 2007. In between that time, he angered multiple investors with some threatening to sue him. However, the market did eventually crash and his fund’s value profited over $2.69 billion. Dr. Burry was then seen sending a “You’re welcome” email to his client.
Jared Vennett and Mark Baum
Jared Vennett, who works in Deutsche Bank heard about Burry’s credit default swaps and understood the significance of the analysis after running through his quant. He then decided to sell the credit default swaps to FrontPoint Partners while earning a fee from it. Vennett explained that the packaging of subprime loans into collateralized debt obligations (CDOs) rated at AAA ratings will cause make the downwards impact even larger. The hedge fund manager of Frontline Partners, Mark Baum was initially skeptical. However, after interviewing multiple people from home owners to real estate brokers, Baum learnt that even AAA rated mortgages are comprised of those with minimal background check, and are therefore extremely risky loans. Baum then bought a few of the credit default swaps.
In the first quarter of 2007, some of the mortgage loans has begun to default, but oddly, the ratings of the mortgage-backed securities still remained at AAA. A frustrated Baum decided to question his acquaintance at S&P and found out that they are doing this as a lot of banks have stakes in these securities and they are afraid that banks will partner with their competitor. Realizing the economy is going to collapse, Baum bought more of the shorts.
When the mortgage bonds continue to decrease in value in April 2007, Baum found out that Morgan Stanley, the umbrella company of FrontPoint Partners, had shorted their credit default swaps which means Baum is betting against Morgan Stanley. This would cause major liquidity problems for the bank. Although Baum was initially reluctant, he eventually sold his positions, making over $1 billion from the transactions.
Charlie Geller and Jamie Shipley
Brownfield Capital’s founders, Charlie Geller and Jamie Shipley found a copy of Venneti’s presentation on a coffee table of a bank lobby by accident. They enlist the help of a friend, Ben Rickett (Brad Pitt) who worked in the financial sector. After confirming that the analysis is robust, Geller and Shipley began shorting the mortgage-backed securities. They eventually profited more than Burry and Baum as they shorted higher AA-rated bonds, which are more stable, but proved to bring a higher reward. Although they were initially happy with the returns from their investments, Ben enlightened them that their win would mean a devastating loss of jobs for millions of Americans.
The Big Short Movie Review
The 2007-2008 housing market crash is no easy topic to cover, but the writers Adam McKay and Charles Randolph did it so effortlessly. The topic itself comes with plenty of financial jargon and analysis that needs to be explained for a laymen person to understand. The film not only does that through its excellent storytelling, it also narrates all these complicated terms in easy-to-understand everyday examples. For example, we had Selena Gomez explaining synthetic CDOs through a game of blackjack. Scenes like these gets the audience in the same page as the characters while also keeping the audience entertained through another celebrity.
As the housing bubble is such a serious topic, it is also fascinating how The Big Short manages to include so many comedic moments and excel so well at them, it became a comedic show. The characters play a huge part in these and the actors serviced these roles really well. Steve Carell, especially fed us plenty of laughter despite playing the role of a frantic, almost always moody fund manager in Wall Street. The one-liners from the movie are golden and something about bringing a bit of light-heartedness into such a devastating topic feels right.
The ending of the film however, is soul-crushing as we see that the aftermath resulted in financial crisis and rising unemployment rates. Despite its comedic elements, The Big Short did not forget to leave the audience with a more serious note in the end. It makes us wonder whether we are still placing blind faith in our financial institutions who as portrayed, are made up of money-hungry individuals. Are we informed as a consumer of financial products? Do we fully understand our investments? Does it feel good to be right like the Baum, Geller and Shipley but have to watch others suffer through an economic crisis? All these are great food for thought.