Most Americans probably hadn’t heard the phrase “mortgage-backed securities” until around 2008, when the subprime-mortgage crisis erupted and sent the U.S. financial system into chaos.
But what exactly happened? That’s the central question of the film The Big Short, an adaptation of Michael Lewis’s 2010 book about a handful of Wall Streeters who uncovered the underlying problems in the mortgage market and bet against (or shorted) the securities made up of subprime debt before all hell broke loose. These underdogs become the winners of the financial crisis. Kind of.
The Big Short is immensely entertaining. The movie makes a serious effort to capture some of the more outlandish Wall Street personas: The socially awkward genius, Michael Burry (Christian Bale); the crank, Mark Baum (Steve Carell); the slimy wanna-be millionaire, Jared Vennett (Ryan Gosling); and the recovering ex financier, Ben Rickert (Brad Pitt). And to put some (likely overemphasized) heart and morality into the story, there is a focus on the dismay of these characters (Carell in particular) as they realize how dire the circumstances they are profiting off of really are.
But perhaps the most ambitious undertaking of the film is to make the jargon and financial concepts behind the crisis accessible, and almost sexy. That last part may be why it’s receiving so much award buzz. (The New York Times financial journalist Adam Davidson was the film’s technical director.) Most movies about finance and Wall Street focus heavily on culture and excess. Remember the cocaine fueled parties of Wolf of Wall Street? The Big Short injects a healthy dose of that, all while urging the audience to understand what really happened and why.
For those who vividly remember the crisis, the movie can be stressful at times, showing all the points at which safety mechanisms failed to kick in. For those who don’t remember or weren’t paying close attention, it’s a good primer on how the recession started. For both groups, it’s worth watching. Below, we discuss the film and what it’s trying to show.
Bourree Lam: Even during the first five minutes of the film, it was clear that Adam McKay (director) and Charles Randolph (co-screenplay writer) were going to explain a lot of financial concepts and products in two hours. The film starts with Lewis Ranieri, the “godfather” of mortgage backed securities, at Solomon Brothers in the 1970s. It then moves on to follow the cast of characters in the mid-2000s on Wall Street (and in Michael Burry’s case, San Diego) as they discover hints of the subprime mortgage crisis and the “big short”—betting against the U.S. housing market and waiting for it to implode. The characters all come to this conclusion through different discovery paths, and in that way I felt the film was thrilling in the way it followed their journeys.
Gillian White: Throughout the film viewers get a primer in collateralized debt obligations (CDOs), tranches, credit-default swaps, mortgage-backed securities, and synthetics. That’s a lot, especially for those who aren’t well versed in financial jargon. In the end, I felt like the effort was a mixed bag. But while I was annoyed by the premise of someone actually bringing a Jenga set into a meeting (and in fact, all the finance people in my theatre audibly groaned along with me), I did think that the use of the structure was probably a visual tool. Essentially, Gosling uses a Jenga tower to show how tranches work: that even top-rated securities couldn’t withstand the failure of lower-rated securities, on which the tower and many CDOs were built. If the lower-rated securities failed, everything would crumble.
Lam: I agree, even though during that scene I mumbled “no one does this in real life!” I thought it was a really helpful illustration of tranches. I found the cutaway explainers less strong: the Margot Robbie bubble-bath scene where she explains mortgage-backed securities was funny, but ultimately a bit confusing. The Anthony Bourdain scene about fish stew and collateralized debt obligation sort of worked. And I never thought I’d see behavioral economist Richard Thaler and Selena Gomez in the same room, but I actually thought they explained synthetic CDOs pretty well.
I admire that the filmmakers took on a really tough task: explaining finance is not easy or fun. Especially something as complicated as the subprime-mortgage crisis. But the film works even if the concepts aren’t completely explained: Even if you don’t understand what a credit default swap is, you get that Burry is going to the various banks to make a deal they think is insane—but he thinks will pay off. You get to be in on the deal, whether you know what the deal actually is or not.
White: Right, so there for instance, I didn’t think they did a fantastic job of explaining why precisely everyone was laughing at Burry, yet also willing to do business with him. And then what precisely that deal entailed, and why his company was forced to pay premiums (which enraged his boss and clients). That is of course, a lot of nuance and jargon, but it felt a little glossed over after they went into such painstaking detail leading up to it.
One of my favorite parts of the film was the trip to Florida, where Carell and his team wanted to do some actual on-the-ground investigation of how crazy the mortgage market might be. There, they find tons of empty homes, lots of liar's loans, a slew of adjustable-rate mortgages ready to go bust, corrupt realtors and mortgage brokers, and an alligator!
Lam: Yes, I thought that was a scene straight out of 99 Homes! It was less morally ambiguous than 99 Homes, in that the viewer knows that this situation involved fraud, and it was definitely not going to end well for the economy.
White: I also thought that the Florida trip did the best job of showing the human side of the crisis, which was sorely needed. When Carell heads to a strip club to talk to a dancer who has bought a house (or five!) he explains to her that her adjustable-rate mortgage payment could increase by 200 percent once her teaser rate ends. And because her home hadn’t increased in value, there was no equity and she couldn’t refinance like she’d been promised. She promptly (and appropriately) freaks out.
There were less provocative scenes that were important too: A family renting a home that an owner had put under his dog’s name, a tenant finding out that his landlord took their rent money and didn’t pay the mortgage on the house they’ve been renting—leaving them out on the street. And immigrants who were duped into signing mortgages that they couldn’t possibly stay current on. It was heartbreaking, and that is the reality of the crisis: actual devastation to people’s lives and livelihoods.
Lam: Let’s skip to the end, when they crash the American Securitization Forum in Las Vegas. I quite liked that part of the film, these renegades going on a truth-seeking trip to see if their “big short” bets would pay off. I also thought the twist in the story was well-done: When their bets aren’t paying off on the timeline they expected, they never suspected that the ratings agencies had misaligned incentives to give unduly high ratings to mortgage backed securities. Did you feel stressed out watching that part of the film? I know I did. Actually, I think watching this reenactment of the financial crisis was stressful in general. I was laughing at the jokes with clenched fists.
White: Totally. Watching the bank failures—rather: near failures—brought up some bad memories. And the ratings agencies! I could talk about the ratings agencies all. day. I think the Forum is also important because it’s where they highlight the fact that the SEC—the regulatory body tasked with monitoring the banks and the securities they offer—often has a weird and dubious revolving door with Wall Street banks. It was a little heavy-handed, but an important link to make about the relationship between the banks and the organizations that should have been catching some of these problems.