As The Big Short unfolds its racing narrative and the protagonists come to curse the authors of the disaster, and as the movie ends with the epilogue text running up the dark screen, we hear investment bankers, stockbrokers, and rating agencies condemned as pure frauds—criminals who should not have escaped jail. We never once—I know that this defies belief, given what has been published about the crisis—we never once hear government mentioned. Not the Federal Reserve, not the government-created, government-backed Federal National Mortgage Association or the Federal National Mortgage Association [Fannie Mae and Freddie Mac], not the legislation pressuring banks to make subprime loans. Not one word. A Martian somehow hearing and understanding this movie would not know that government existed—except for a few mentions of how government regulatory agencies were asleep at the switch. Capitalism, the private sector, through greed, stupidity, and sheer denial, brought on this epic collapse of the U.S. economy and endangered the world financial system, which had to be saved by governments.
It is impossible to see this as an innocent error. Perhaps in 2010, when Michael Lewis published his book—possibly, and I am stretching, here—a writer might have focused on the direct, immediate locus of the tragedy and missed its essential cause. But by 2015, when this film was completed and released, dozens of books and articles had laid out explicitly, irrefutably the role of government as enabler of the crisis. I might mention the account by a leading banker, John A. Allison, who went through the entire experience, managed his bank to save its depositors from the disaster, and then told the story in The Financial Crisis and the Free Market Cure [McGraw-Hill Education, 2012]. There are many other accounts, such as “Who Really Created the Global Financial Crisis”? The Big Short is told as though they do not exist.
Walter Donway, writing in the Savvy Street website (which I heartily recommend).
It is worth noting that portrayals of how financiers operate are not always bad or glaringly lacking in context. As mentioned on this blog before by Brian Micklethwait, one of the best movies made about the crisis has been Margin Call, starring the likes of Kevin Spacey and Jeremy Irons. That film does not seek to claim that bankers are all evil bastards masterminding, well, evil, like a lot of jumped up Bond villains who are evil because that is what they are. Rather, it shows a lot of flawed, not always admirable but very human, well, humans dealing with a fuck up as well as they can. Even Wall Street, the Oliver Stone movie of the 1980s, is pretty good to the extent that the “Greed is good speech” contains some pretty serious truths (alas, undermined by what Gordon Gekko says later about how business is about a zero-sum game, which it isn’t). It seems the fundamental failing of The Big Short (written by Michael Lewis), both in the book, and the film made about it, is what it leaves out, as Walter Donway correctly notes. There is no fundamental explanation of why the crisis happened. Ask someone why the crisis happened and they blather on about “bankers” or “greed” gives us as much information about developments as when a person tries to explain the origins of the First World War by saying “warmongering”, “Kaiser Bill” or “bayonets”.
I might see the Big Short, but given my own Scrooge-like approach, will buy the DVD when it comes out cheap, or via that capitalist marvel Amazon Prime, to which I now have access. (Woot!)
Funny, no one was complaining about bankers and investment people in 2005. (Or in 1928, or internet stock boosters in 1999, etc….)
“The burnt customer certainly prefers to believe that he has been robbed rather than that he has been a fool on the advice of fools.”- Fred Schwed
“Margin Call” reminded me of “Glengarry Glen Ross” scaled up and toned down. Kevin Spacey is in both films, of course. Paul Bettany, as the hotshot yet dissatisfied trading manager, looks like a young, twitchy Ed Harris. Simon Baker, though not nearly as loud, is more than reminiscent of Alec Baldwin’s character Blake. And Stanley Tucci, playing the sacked quant who first spots the financial blowup coming, closely resembles Nassim Nicholas Taleb, of Black Swan fame, who predicted the 2008 crash. Director and screenwriter J. C. Chandor was very clever to put these allusions into the film, if indeed he did.
I saw it all happen.
I was a top ten originator of mortgages working for a top 5 firm from early 1997 to mid 2010. The Community Reinvestment Act was signed by Jimmy Carter. Bill Clinton upped the ante by amending this act thus forcing banks to make real estate loans to “approved minorities” who were ostensibly left out of the home buying population for the simple reason that their credit was lousy, they didn’t have the down payment and/or their income/expense ratios were too high.
Then the sub prime loans began so that the banks could originate these loans without holding them as assets and destroying their solvency. Wall Street was happy to securitize these loans as they had been securitizing Fannie and Freddie mortgages as well as Ginnie Mae’s (Veteran’s (VA) and FHA) loans for a long time.
Next: As new lending institutions began eating into Fannie Mae and Freddie Mac’s market share the two GSE’s (Government Sponsored Enterprises) began to lower their credit standards and began to offer sub prime mortgages themselves. The waterfall effect took over and each quarter saw easier and easier underwriting standards topped off by NINJA (No income- No Assets- No Job)loans where a borrower did not have to disclose whether he had any income, any assets or even a job. On the 1003 application form that the nation was required to use. that information was blank, so you had a name, a social security number, a home address and a birth date. Then if the borrower had mediocre credit – that was a loan approval.
You have to understand that Fannie and Freddie were totally and utterly run by Democrats. You walked out of a Democrat administration into a cushy job at Fannie or Freddie, worked there a few years, got stock options and walked away rich . One FNMA CEO got $110,000,000, Franklin Raines. Clinton’s HUD secretary Raines lied, cheated and cooked Fannie Mae’s (FNMA) books. He did not go to jail.
The Wall Street firms saw what the government was doing and eagerly began securitizing all this junk paper making a great deal of money. Wall Street has always done this but never with the 100% approval of the Washington bureaucracy.
There is so much more. Read Peter Wallison’s book “Hidden in Palin Sight’. He did a lot of research and can corroborate what I have said.
Not one Democrat went to jail. Wall Street threw millions at Democratic candidates and so they didn’t go to jail. Congressmen got sweetheart mortgages (rates below the market) from the largest independent mortgage company – Countrywide, so they never said a thing nor did any of them go to jail. Countrywide’s CEO Angelo Mozillo made some $500 million personally, paid a $67.5 million fine and that was the end of Washington DC wrist slapping.
That is it in a nutshell. My classmate at Harvard Business School, John Paulson, made billions shorting this whole nonsense – good for him.
My whole point in giving the background is that this was a Democrat caused problem. Hollywood is Democrat. So, they will not make their ideological friends look bad. Very simple. That is how it works.
John: I dislike America-centred explanations for the crash. The first bank to fall was British, the housing market worst hit was Spanish, and the nation worst hit was Iceland. The US is the centre of global news, sure, but it’s not the only country that had these problems.
Was Barney Frank as big of an enabler of Fannie Mae and Freddie Mac as was reported at the time?
That was another big lesson of the Crash; how fragile and inter-connected high finance is, internationally. It was mysterious to middle-class observers, how everyone in southern California defaulting on their mortgages could cause all the banks in Iceland to collapse the following year.
It is not just Hollywood and the television networks – they reflect the education system and the “serious” media.
For example I waited for years for the Economist magazine to review such works as Thomas Woods “Meltdown” (about the general increase in the money supply by the Alan Greenspan Federal Reserve) or Thomas Sowell’s “Housing: Boom and Bust” (about the specific government distortions in the housing market – none of which have been corrected).
They never did – to the education system and the “mainstream” media government can not be too big or too interventionist, only too small or not interventionist enough.
Their answer to every bust is more “stimulus” (government bailouts for the banks, and general government spending).
And the cause of the busts?
It is never the Credit Bubble money supply of the Federal Reserve.
After all Irving Fisher was not discredited by the “keep the price level stable” antics of Ben Strong (New York Fed) in the late 1920s – he remained the most influential American economist, even with “free market” types such as Milton Friedman.
Alan Greenspan was presented as “free market” type also.
Any failure of the statism is presented (by the education system and the media) as a failure of “free market fundamentalism” (the description of Mr George Soros of a society where about half the economy is government spending and the rest of society is dominated by detailed government regulations covering just about everything) and a reason for more statism.
How can Hollywood produce anything other than it does – when the education system and the “serious” media is like it is?
After all the United Kingdom is presented as having a policy of “austerity”.
Just like every junkie says they are “cutting down”.
It is all a lie (there is no “austerity” – just as Alan Greenspan and co were not “free market” supporters, they were Credit Bubble swine) but the public can not be expected to know it is all a lie.
And Hollywood reflects the same false picture of the world.
Alsadius,
I was responding to Jonathan Pierce’s question (Read the article, dude) as to why the movie excluded any mention of politics, Fannie and Freddie and so forth. So, I decided to stay on topic and answer the question posed by Mr. Pierce base on my 15 years of inside experience and in depth knowledge.
You bring up Iceland. Ok, I will bring up Myanmar, Tahiti and the prices of bananas in Nicaragua to be as off topic as you. Go watch a soccer game.
I was involved (still am, in fact) in the subprime mortgage industry for much the same time as JGIII (not as a loan originator, but rather in secondary marketing, credit policy and related areas), and his brief summary of that era is pretty accurate. However, the history of subprime loans goes much farther back than he implies (banks got into that game very late, and essentially destroyed what had been a nice, profitable cottage industry because they were clueless about how to underwrite those loans or to properly price for their inherent risk). But that’s a minor quibble, and a discussion for another day. And I certainly agree that there should be a special place in Hell reserved for Angelo Mozillo and Franklin Raines (and their enabler, Barney
FagFrank.But the mortgage meltdown, destructive as it was, was only one small part of the global financial collapse of circa 2008. As Walter Donway notes in his review, at its core the collapse was the direct result of government action. This was not merely the Community Reinvestment Act, but also regulatory (i.e., political) pressure to expand home “ownership”* to people who, frankly, were unprepared for it, financial and regulatory accounting rules which may have had some theoretical, ivory tower justification but which utterly failed in practice, and most importantly Federal Reserve actions in grossly inflating the money supply and its general embrace of “bubble economics”. The picture is huge and complicated. There is no way it could ever be adequately portrayed in a single movie, and especially not in one targeted toward a mass audience.
Which brings me back to the central point of this thread: the deficiencies in The Big Short. I haven’t seen the movie yet (although I plan to; several of my mortgage industry friends have highly recommended it). I have no doubt that those deficiencies, as described by Donway and others, are real and substantive. But trying to explain to a mass audience the nuances of such things as loan securitizations, capital regulations and federal intervention in the mortgage market, would be a non-starter. There are, after all, real people at the heart of the financial industry, and chronicling their actions during a period of crisis provides all the drama any movie needs. Trying to do more would have turned it into a polemical.** Margin Call (a very good movie) examined some of these same events from an entirely different perspective, and it also focused on the people, not the system per se. And it worked well. Perhaps there is room for one or more additional movies looking at the actions of Franklin Raines and Barney Frank (George Romero should direct that one!), and another from the perspective of the rating agencies (Moody’s, S&P, etc.) trying to come to grips with a rapidly changing economic environment and the development of unprecedented financial instruments and structures. I hope so.
So I am reticent to criticize The Big Short merely because of the narrowness of its focus. I think this is a more nuanced review of the movie.
* To me, anyone who has put little or no money down on a house is not an “owner”, but merely a disguised renter.
** Which, of course, is the same problem which beset Atlas Shrugged (both the book and the movies).
I(Re John Galt III and Alsadius): The first major British Bank to totter was Northern Rock which (as was reasonably well reported at the time) had invested heavily in the US mortgage market. The next to totter had recently taken over a Dutch subsidiary which had likewise invested heavily in the US Mortgage market. Things then became more general and the PC brigade became more emphatic in pushing their preferred explanations, but back in autumn 2008 the relevance of the US mortgage market to what was happening was straightforwardly mentioned on the beeb and similar such outlets.
I thought the film did a decent job with a very tricky subject to bring to what is an entertainment film. It didn’t really touch on the deeper causes, but I doubt many would really expect them too. They could have done a better job of pointing out the very obvious that this was caused at it’s heart by people taking on home loans they could never repay, but they did touch on it a bit more than I expected.
I’m looking forward to The Big Short, based on the reviews at Zero Hedge.
An imperfect, but still worthwhile, watch on the GFC is the documentary “Inside Job“. As above, skirts around placing the blame in the government’s lap, but still covers some good ground in an accessible way.
Also worth a watch is the commencement speech of Michael Burry, one of the main characters in The Big Short.
Sorry, but seeing as Margin Call was a very good film, and still I’m sorry I’d spent the few bucks I did on it, I’ll be giving this one a pass. Yes, the issues are complex and can’t be made understandable to a lay audience of a single film – and yet, there is nothing that precludes the filmmakers from at least planting some obvious hint encouraging people watching to ask the obvious question: what were the reasons for this insanity? Imagine all those WWII movies without the mass audiences having any prior knowledge about Hitler and his government. Far from a perfect parallel, but I hope you can see what I mean.
One last thing to prove the Democrats have blood on their hands. Obama’s first budget director, Peter Orszag, along with his brother and Economics Nobel Prize winning idiot, George Stiglitz wrote a whitewash report in 2002 saying that Fannie and Freddie were fundamentally sound and would never go bankrupt so just let them do whatever they want as they are terrific companies run by experts.
http://streeteasy.com/talk/discussion/18851-stiglitz-fannie-poses-no-tax-payer-risk
and Obama is a Christian, who will unite us, loves the United States and believes that Islam is just dandy as it is a religion of peace and had so much to do with the founding of America.
Inside every liberal is a totalitarian screaming to get out.
While I agree that the Democrats were primarily responsible for the bubble and crash, there is plenty of stick to go around. A Republican was President from 2001 through 2008, and he didn’t do anything to rein in Fannie and Freddie or stop the subprime orgy. Republicans were Speakers of the House from 2001 through 2006; when a Republican Representative started poking into Fannie and Freddie, the Speaker stripped his subcommittee of jurisdiction.
I think there was failure to see where this would lead; reluctance to meddle with a process that was apparently driving economic recovery from the dot-com bust and 9/11; and of course, reluctance to confront the big-money donors in the financial industry who were making tons of money.
Given that we have a couple of experts in this thread, I’m going to ask a question and perhaps Laird or JGIII will be able to enlighten me.
Late last year, SWMBO and I refinanced our mortgage loan. No “cash out” stupidity, just taking advantage of the Fed’s 0% idiocy to reduce the interest rate and shorten the term. The other week, we received a letter informing us that our loan had been bought by Freddie Mac.
Now, this is a conventional loan, not FHA, less than 80% LTV, all done (as far as we were aware) on a free market, private sector basis.
So here’s my question: What’s the government doing getting itself involved in our mortgage loan? Can it be that there’s actually a market that consists of private companies originating loans and then selling them to the government? If so, that strikes me as quite a lucrative enterprise, as you wouldn’t need that much capital and would be able to recycle the capital that you did have every couple of months or so. Which is great for the originators, but leaves me wondering what purported public good is served by using my tax dollars in this fashion.
@ the other rob: “Can it be that there’s actually a market that consists of private companies originating loans and then selling them to the government?”
That is precisely what happens today: private companies (largely banks, but there remain significant non-bank mortgage originators, too) make the loans and sell them to Fannie Mae/Freddie Mac (the GSEs), often (but not always) retaining the “servicing rights” (which permits them to handle the payment processing and related functions for a small ongoing fee). At the moment it is a lucrative enterprise, although it may become substantially less so as interest rates rise and the number of refinancings falls off. The independent lenders don’t have all that much capital; they fund their loans on a short-term basis through what is called “warehouse financing”, until they can be sold to one of the GSEs.
The government involvement comes in various forms, including heavy regulation of the originators (both by the states and, now, by the CFPB), but most especially via the GSEs themselves, which establish the underwriting criteria the lenders must follow in order for the loans to be salable. Those criteria contain a large political component. And government involvement also takes the form of implicit and explicit federal subsidies of the GSEs. Why is the government “getting itself involved in our mortgage loan“? Because it’s good politics. Politicians want to foster widespread home ownership (whether those “owners” are prepared for it or not) and simultaneously (and paradoxically) to keep property values high. So they subsidize mortgages and mortgage lending in numerous ways, most of them hidden from view.
A truly private mortgage market has existed in the past and could again (and I argue that now is precisely the time to return to that model, with interest rates being at historically low levels, by dissolving the GSEs), but the GSEs are too powerful and there is no political will to eliminate them. Today they control roughly 90% of all mortgage originations (vestiges of a private market do remain), and I don’t see that changing any time soon.
Does that help?
Laird,
May I ask for your expert opinion (without assuming any liability for any negligent mis-statement), as to why, if a loan (or loan book) is called and sold as ‘sub-prime‘, anyone was surprised or aggrieved when, as we might say over here, ‘it did what it said on the tin‘?
Mr Ed, we’re ranging a bit far off topic now, but I’ll offer a brief answer to your question.
Loans can be considered “subprime” for a wide variety of reasons, not all related to credit quality. For example, it can be because the borrower can’t properly (to the satisfaction of the GSEs) document his income, or because he is self-employed but not for long enough to meet their underwriting criteria, or due to a prior bankruptcy without sufficient re-established credit, etc. But most are, of course, because of a poor (or limited) credit history. Even in those cases, however, there are all sorts of reasons for the poor history. Someone can be an habitual deadbeat, or he can have had a fine payment history until some extraordinary event occurred, such as a divorce, death, or medical problem. The former is likely a bad loan, the latter not necessarily so (even though they might have identical credit scores). That’s why underwriting subprime loans is so difficult, and why their underwriting cannot be automated or fit neatly into a box as is done with “conforming” loans. That’s the real reason the subprime industry blew up: the GSEs and Wall Street banks tried to capture that market but had no clue how to do it.
Even if a loan is labelled “subprime”, that doesn’t automatically mean it will default. The default rate on subprime loans might be triple that of conforming loans, but it nonetheless remains true that the vast majority will still perform acceptably. (They might have a few more delinquent payments but most will still eventually pay.) And even on the ones which do default, if there is a reasonable amount of equity in the property the lender won’t lose too much once it completes the foreclosure. So as long as you recognize the risks, do your best to mitigate them (through proper underwriting as noted above, and with a pro-active servicing and collection process), as long as you price it properly subprime lending can be (and historically was) quite profitable. It’s simply a numbers game, but you have to understand those numbers. The GSEs (and Wall Street) ruined the business by screwing up the underwriting, and then pricing so aggressively that they squeezed out all the profit. In summary, they were both ignorant and arrogant, which is generally a bad combination.
I could pontificate on this for pages, but that’s not fair to other readers or to our hosts. If you want to delve into this topic more deeply feel free to contact me directly; as an author here you should have access to my email address.
Laird, that is a very helpful précis of the ‘sub-prime’ market. Of course, the backdrop of a Federal Reserve and fiat money made the loan market larger, and the mirages of low interest rates and cheap credit may well have made the illusion that all these loans put together were a better bet than the name suggested.
Laird – thank you, that explains matters quite nicely. I will admit to some surprise at how close to the truth my off the cuff assumptions turned out to be.