The Big Short
Produced by Plan B Entertainment 
and Regency Enterprises 
Directed by Adam McKay 
Screenplay by Charles Randolph 
and Adam McKay 
Distributed by Paramount Pictures 

In the 90’s of the last century, I used to supplement my academic income by coaching investment bankers and corporate CEOs.  My job was to help them prepare presentations designed to persuade the well-heeled to bet large sums of money on their enterprises.

The investment bankers tended to be in their 20’s and early 30’s.  They routinely worked 60 to 80 hours per week inveigling privately held companies to sell shares in their firms to the public.  As a consequence of their preposterous hours, these young men and occasionally women were often mentally frazzled and physically exhausted.  Despite this, they were entrusted to make decisions involving millions, even billions, of dollars.

How curious, I thought.  Why would allegedly circumspect financial institutions risk their reputations on the judgments of sleep-deprived youngsters?  What I didn’t understand at first was that going public during a economic upswing was a sweet deal for the insider crowd, both the bankers and the company principals.  By SEC rules the insiders are allowed to buy the corporate shares resulting from an initial public offering at substantially discounted prices and then turn around and sell them for the much higher prices charged to the general public.  The insiders didn’t have much incentive to be all that careful about how they proceeded.  Their primary concern was to bring privately owned companies to the stock market to sell shares in their enterprises to the public.  For that, all they needed were high-energy kids willing to fly about the country knocking on prospects’ doors.

The CEOs who agree to be groomed for the prime-time Wall Street whirligig are generally of two types.  The first comprises generally intelligent men in their 50’s or 60’s, well schooled in the particulars of their companies but often so smothered by day-to-day detail that they are incapable of clearly explaining to outsiders just why their companies are good investment prospects.  CEOs of the second type are rich boys who have attained their positions by virtue of family connections.  They generally do not trouble themselves to learn just what their companies do.  I recall working with one such gentleman whose remarks made it clear he had little understanding of his company’s operations.  Although he headed a medical-supply company, he didn’t know why his letterhead displayed the staff of Caduceus.  When it was explained to him, he merely nodded with an incurious smirk.

The common thread connecting all these people was scorn for the investors who made their prosperity possible.  These folk they regarded at best as a necessary bother.

Not having enough cash at the ready to waste on speculation myself, I rarely paid close attention to the corporate spiels beyond what was necessary to fix their structure and grammar and add an apt metaphor here and there to make key points memorable.  Only with the collapse of the financial markets in 2008 did I discover how foolish I had been.  Had I paid more attention, had I schooled myself in the investment market, I might have recognized I was witnessing the early signs of financial disaster.  I might have even had the opportunity to bet against the market and enrich myself, as did the principals Michael Lewis discusses in his entertaining study The Big Short: Inside the Doomsday Machine.  Of the things I would have had to learn, the first would have been how to short the market.  (In essence, the market shorter borrows from his broker shares that he believes to be overvalued, pledging to buy them some time later at whatever their future price turns out to be.  The shorter is speculating that when it comes time for him to settle up, the shares’ price will have fallen.  If so, the broker must pay him the difference.  Of course, it can go the other way, putting the borrower awkwardly on the hook for the increased value.)  Suffice it to say, I would have had to have a titanium girded stomach to risk my slender thousands on such bets.  Shorting the market is riskier and rather more complex than I could ever have imagined.

The film adaptation of The Big Short, directed by Adam McKay, begins with the story of Dr. Michael Burry (a superbly subtle Christian Bale), who did pay attention to market investments and how to short them.  He was a whiz-kid stock analyst in the early 2000’s, running his own company, Scion Capital, in Cupertino, California.  We first encounter him sitting in a glass-walled office wearing the very un-Wall Street ensemble of shorts and sweatshirt.  He’s devouring prospectuses, searching for value, as he puts it.  One day a report on a relatively new investment vehicle called mortgage-backed securities catches his attention.  MBS, as the cognoscenti call them, comprise residential mortgages of various risk levels from the safest Triple A to the shakiest B that have been bundled together to create a new investment bond.  Burry determined that many of these bonds were wildly overvalued.  While some of the mortgages placed within them could conceivably be rated Triple A, many were considerably lower.  What’s more, he discovered that many of the originating banks had abandoned traditional regulations.  As the mortgage-backed bond market expanded, bankers, brokers, and real-estate agents needed more mortgages with which to create more bonds to keep the money machine going.  To do so, they approved riskier and riskier loans euphemistically called subprime mortgages.  These were mortgages often issued without credit or even employment checks.  Local banks went along with this chicanery because they never intended to be the mortgage creditors over the life of the loans.  Instead, they sold them to large investment banks, such as Morgan Stanley, Goldman Sachs, and the late unlamented Bear Sterns, where they were bundled into MBS.  Despite their underlying weakness, these bonds were trumpeted as safe because, well, who doesn’t pay his mortgage?  Answer: Almost anyone who hasn’t put any of his own money in the house he “owns” and who cannot afford to make the monthly payments.  In short, Burry recognized there would be enough mortgages defaulting to sink the bonds in which they were placed.

Awful, right?  That’s not how Burry sees it; instead of disaster, he saw value.  It lay in shorting the bonds—that is, betting against them.  This entails buying credit-default swaps (CDS) on the bonds, quasi-insurance vehicles that obligate the seller to pay the buyer full value of the bond should it lose its value.  Burry buys $750 million of these CDSs from every investment bank willing to take his money, which means all of them.  Jared Vennett (based on the real-life Gregg Lippmann, and portrayed in the film with icy arrogance by Ryan Gosling) gets wind of Burry’s scheme (although Lippmann now denies it) and, after investigating it, realizes it makes eminent sense.  So in order to expand his stake in the deal he intends to make, Vennett tries to persuade investors to join him in shorting the market.  He meets with little success until he encounters Mark Baum (the pseudonym used for Steve Eisman, played snarlingly by Steve Carell).  Vennett puts on a show at Baum’s office, suavely employing a Jenga tower to illustrate his claim that the entire mortgage market will soon be toppled by its subprime sector, signified by the lowest blocks in the tower.

As played by Carell, Baum is a perpetually irritable man who cares enough to think the very worst of everyone in his business.  He fancies himself a moral crusader against duplicity and larcenous practices.  We meet him while he’s ranting apoplectically to his wife about yet another devious Wall Street operator he’s uncovered.  In response, she pleads with him to quit, but he insists he loves his job.  And he does.  He thrives on righteous hostility and the rudeness it licenses him to wield.  He gains satisfaction from telling people, especially investment executives, that they’re stupid or dishonest, or both.  What got him especially worked up was the subprime-mortgage-backed security market to which Vennett introduced him.  It had been hawked as a sure thing on television.  How could such an investment ever fail?  Even Fed chairman Alan Greenspan got into the act, reassuring Americans that all was well on Wall Street.  After all, didn’t home values always go up?  Well, no.  In the 1930’s houses lost 70-80 percent of their value, and homeowners who wanted or needed to sell them were financially ruined.  But Wall Street didn’t and doesn’t like to look backward.  That’s bad for business.  Besides, should anything go seriously wrong, can’t the government get taxpayers to foot the expense?

For his own peace of mind, Baum sends members of his staff to Florida to investigate a leading epicenter of the subprime sector.  While there, they visit a strip club where they meet a young working girl who blithely informs them that she “owns” five houses thanks to the magic of subprime mortgages.  Rather than stuffing five-dollar bills into her sequined bikini, they inform her that her unvetted investment may soon be nearly worthless.

Carell’s Baum is a man caught in an existential conflict.  Although what he’s discovered confirms his moral outrage, he’s nevertheless eager to cash in on the opportunity it presents.  He has little doubt that the housing market will hurl America into financial catastrophe, but he also knows that by betting against this market he will become a multimillionaire.  Sure, hundreds of thousands will lose their homes, their savings, their investments, and their pensions, but Baum will become very, very rich.  Quite a moral crisis, no?

Although I haven’t encountered the term black comedy in many years, Big Short may revive it.  Some have complained the film makes fun of other people’s suffering.  I don’t think that’s McKay’s objective at all.  Rather, he’s used humor to reinforce what we discovered in 2008: Our financial institutions employ many whose short-term thinking is wholly unrestrained by conscience.  In a closing scene, the film briefly shows us many Wall Streeters being carted off to jail.  Then the film judders to a stop, and Gosling’s Vennett explains in mordant voiceover that that wasn’t what happened.  No one went to jail; in fact, the people—including the schemers—in the investment industry are prospering more than ever, thanks to the American taxpaying schnooks who bailed out the big banks.  Comedy doesn’t come blacker than this.  


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