The Big Short (2015)

“Mortgage-backed securities, subprime loans, tranches. It’s pretty confusing, right? Does it make you feel bored? Or stupid? Well, it’s supposed to. Wall Street loves to use confusing terms to make you think only they can do what they do. Or even better, for you just to leave them the fuck alone. So, here’s Margot Robbie in a bubble bath to explain.”

– Ryan Gosling as Jared Vennett

If ever there was a Hollywood director brave enough to tackle the behind-the-scenes machinations of the American housing market, Adam McKay is the last person I would have suspected. Don’t get me wrong, I’m as big a fan as anyone of Ron “Go F**k Yourself San Diego” Burgundy and the Channel 4 News Team. However, the man who brought the world Anchorman would not have been my first pick to helm a biopic on the 2008 housing crisis. It is only with hindsight that I can truly appreciate what a risk the heads at Paramount Pictures were taking when appointing Mr. McKay as director. In the end, it is completely absurd just how well that gamble paid off.

Plot Summary

The film oscillates between three disparate groups of investors looking to do what they do best. Christian Bale portrays Michael Burry, a doctor-turned hedge fund manager whose character is based on a real-life figure. With a self-proclaimed awkward social demeanor, Dr. Burry utilizes his highly analytical nature to review the individual contents of thousands of mortgage bonds. He comes to the realization that a gigantic chunk of these loans will not be able to be paid back by the homeowning borrowers and will eventually be defaulted on. This leads Batman M.D. to conclude that the collapse of America’s housing market is a certainty and presents an opportunity to cash in. Michael pays visits to several Wall Street financial firms, convincing them all that he is grossly mistaken to bet against the housing market. Nevertheless, they are willing to take everything he has to offer.

Through a butterfly effect-like series of events, Ryan Gosling’s Jared Vennett, a Deutsche Bank trader, catches wind of Burry’s intent to short the housing market and is eventually discovered by the hedge fund team at FrontPoint Partners, led by Mark Baum played by Steve Carell. Vennett educates Mark and his team on subprime loans and how these will contribute to the impending collapse. After conducting their own investigation and seemingly confirming that Vennett was telling the truth, the FrontPoint Partners agree to short America’s housing using swaps sold by Vennett.

The final cohort of characters features Jamie Shipley and Charlie Geller as the founders of Brownfield Capital. Following a failed interview with Ted Chris at JP Morgan Chase, Jamie and Charlie discover Vennett’s prospectus on the housing market crisis. The pair quickly recruits former trader Ben Rickert, played by Brad Pitt, to help in obtaining their ISDA which will allow them to take a short position. With this agreement secured, Jamie and Charlie devise a short method by betting against the supposedly safe and diverse AA securities.

Despite being viewed by everyone else as foolish, in the end our heroes are vindicated when their short predictions come true. They each profit millions of dollars as the entire global economy is plunged into a recession.

Financial Breakdown

In essence, a short sell is the antithesis of a traditional investment. Where your typical investor looks for a stock that is currently undervalued and invests in the hopes that the share price rises, a short is the opposite. The investor, hypothesizing that the current value of the asset is overinflated, is willing to put up money in the hopes that the overvalued asset decreases. Money can be made through a short sell when the investor borrows shares that are currently owned by someone else and sells these on the market. In the event the share drops in price, the investor buys it back at a decreased price, making a profit.

A gross oversimplification of short selling you say? Well, don’t mind if I do:

  • Step 1: A short seller borrows shares of a given stock (usually through a Broker)
  • Step 2: The short seller sells the borrowed share(s) on the market to any willing parties
  • Step 3: The short seller prays to Jebus that the stock price decreases below what they sold for
  • Step 4: Eventually, the short seller must buy back the same number of shares they previously sold (after all, they did only borrow the shares)
  • Step 5: The short seller returns the shares to the original lender and either pockets the difference or moves back into Mom’s basement

Another oversimplification, but with math!

  • Let’s say an up-and-coming entrepreneur named Creed believes the stock price of Dunder Mifflin Paper Company is expected to fall. Looking to capitalize, and with all his investments currently tied up in a local beet farm, he goes hunting for shares he can borrow. After being turned down by Jim, Pam, Oscar and Stanley, his co-worker Todd “Pack-Man” Packard claims to be a completely trustworthy and totally legit Broker and secures 3 shares of DMPC stock for Creed. With the current stock price at $23 a share, Pack-Man helps Creed sell the shares, earning Creed a total of $69. The next week, it’s announced the company’s Vice President is arrested after being convicted of fraud. The company’s stock price drops 60%, resulting in a new price of $9.20 per share ($23 x (100% – 60%)). Creed still needs to buy back 3 shares in order to return them to his Dealer Broker. However, it only costs him $27.60 since he is now buying the shares at the deflated price (3 x $9.20). Because he originally sold the shares for $69, he was able to pocket the difference of $41.40. Unfortunately, as an employee of Dunder Mifflin, Creed is subsequently placed under investigation for insider trading, a topic we’re sure to cover in the future.

Review

The Big Short is without a doubt one of my all-time favorite movies. Not just on the subject of finance, but considering all movies produced since 1903’s The Great Train Robbery. Its a film I find myself coming back to rewatch again and again. Each subsequent visit has served to further clarify the densely packed subject matter, to the point where each viewing has left me walking away with a new piece of the mortgage backed-security-like puzzle that led up to the housing bubble.

Based on the above description of short-selling, you might have a bit of an uneasy feeling. Maybe you’re even wondering if the main characters are bad guys that the audience is meant to root against. After all, earning a substantial monetary profit while millions of people were displaced from their jobs and homes isn’t exactly a shining example of altruism. In the hands of a lesser cast and crew, that could very easily have been the case. However, any feelings of ill-will toward the protagonists are averted through the painstaking level of detail dedicated to making you care about each player on a personal level. The movie doesn’t ask you politely to accept these characters for who they are – it shoves them down your face until you walk away feeling like you’ve known them for years. In other words, it gives the movie a heart.

Throughout it all, The Big Short never fails in its ability to continually inject some much-needed humor into a subject that, according to the movie’s own words, is designed to bore you. Thanks to the hyper-cut editing, boisterous performances of the entire cast, and inordinate use of the word “fuck”, this movie zips along at a pace faster than the collapse of Bear Stearns. The Big Short is the film equivalent of Adderall; exciting, stimulating and unyielding in its demand over your attention until it hits you in the face with some closing credits Led Zeppelin.

Closing Thoughts

At the risk of sounding overly enthusiastic, and in the spirit of full disclosure, I feel it necessary to clarify that I am not an expert in the arenas of real estate, economics or investing. I say this to instill confidence that you do not have to be a licensed agent, hedge fund manager or land baron to enjoy this film. I truly believe there is something here for everyone, regardless of your level of familiarity with the Great Recession. That said, maybe one of the reasons it resonates so deeply is because I can remember in vivid detail the impact the housing crisis had on myself and my family.

I was in high school during the 2008 crisis. As you can imagine, this meant I was far from owning my own piece of real estate and therefore still unable to accrue thousands of dollars of debt to secure a modestly sized dwelling which is almost guaranteed to underperform the average rate of return of any US stock market index fund. The American dream, right? While I was not particularly concerned at the thought of losing my own livelihood as a part-time animal caretaker, I do remember the added pressures that the housing crisis exerted on both of my parents. Even as a self-absorbed teenager I could recognize the stress and fear they tried to hide, knowing full well they still owed thousands of dollars on the mortgage of my childhood home and that no one’s job is fully secure. I will be forever grateful that our family was one of the lucky ones. Both of my folks were fortunate enough to keep their jobs and that same house is now completely paid off. Even still, I left high school and entered the real world (more school) with what I suspect will be a lifelong appreciation of and cold sweat-inducing fear over the power of debt. Despite my own personal feelings on the subject, this movie was able to pull me into the rat race so that I too could relish in the ride, right up until the inevitable end that we all knew was coming. That is how I know this movie is truly something special.

I highly recommend The Big Short to anyone who has an appetite for Jenga towers, strip clubs, celebrity cameos or gaining an above-average understanding of one of the worst financial disasters in history. The least flattering thing I can say about the movie is the awful haircuts that the majority of the cast is sporting.

Final Rating: AAA-rated bond

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