Lessons from The Big Short & How to Protect Yourself

“The thought-provoking film is a timely reminder of the lessons from a financial crisis which are too quickly forgotten.” Patrick Durkin, Sydney Morning Herald

Hollywood Tells the Story of the Lie That Crashed the Economy

The Big ShortHollywood’s cinema version of The Big Short, based on Michael Lewis’s best-selling book on the financial crash, was releases to DVD in March of 2016, following a successful run in theaters. Now six years after the 2010 release of the book, which detailed the story of a handful of stock market contrarians who saw that something was rotten on Wall Street, the message continues to be relevant in addition to entertaining.

The Big Short opens with narration by Ryan Gosling’s character (Jared Venet in the movie, based somewhat on Deustche Bank salesperson Greg Lippmann) introducing The Big Short as a story about “the giant lie at the heart of the economy.”

Exactly what was that giant lie? The fact that the post-9/ 11, post-tech-crash recovery was a doomed-to-fail boom cycle sustained by consumer spending based upon a financial illusion … a huge housing bubble that just a few contrarians could see. As one character in the movie asserts matter-of-factly, “No one can see a bubble; that’s what makes it a bubble.”

The Big Short Book

Director Adam McKay took on a seemingly impossible task: to adapt an intricate complex financial story for box office profits while both entertaining and educating a broad audience of non-economist movie-goers. As Ryan Gosling told Vulture.com,

“The film’s point of view is that the language of high finance feels alienating because it’s designed to alienate you, to make you feel like you can’t understand it, so that basically you won’t ask too many questions. And this was like, ‘Let’s pull the curtain back on that whole machine.”

In order to pull back the curtain, McKay often breaks the sacred “4th wall” of cinema with vignettes and narration in which characters (and real-life celebrities) speak directly to the viewer. Terms such as mortgage-backed securities, CDOs (collateralized debt obligations), synthetic CDOs and credit default swaps (the financial instrument developed to bet against the housing market) are described in layperson’s terms:

  • Playing up on the “bubble” theme in a reference to her role in The Wolf of Wall Street, Margot Robbie describes why subprime mortgages are, well, subprime (she uses a different word) while sipping champagne in a bubble bath.
  • Renown chef Anthony Bourdain explains CDOs by explaining how 3-day old fish is repackaged and sold as something “new” in the fish stew special of the day.
  • Pop star Selena Gomez partners with economist Richard H. Thaler at a gaming table in Las Vegas to describe how synthetic CDOs utilize leverage to place bets upon bets, thus significantly expanding the dollars put at risk by the securitization of mortgages.

Meanwhile, the four stars of the movie– Ryan Gosling, Brad Pitt, Steve Carrell and Christian Bale (nominated for an academy award for his portrayal of Michael Burry)– bring the plot forward with perfect performances.

Especially engaging is Christian Bale’s performance of Dr. Michael Burry, a research-obsessed neurologist-in-training turned money manager who predicted exactly how, why, and when the housing market would unravel. Meticulously based on the real-life Burry, down to the small details of his glass eye, his pain with direct discussions, and his propensity to play drums to alleviate tension and stress, Dr. Burry was maybe the first to see the crash coming.

A host of engaging supporting actors help to detail the financial absurdities of the day:

  • Melissa Leo has a short however memorable part as a rating agency manager (Standard & Poors, now S&P Global) who defensively dismisses concerns that mortgage bonds are failing, only to then admit, “If we do not give (the banks) the AAA ratings, they’ll go to Moody’s down the street!”
  • An ever-cheerful Florida real-estate agent tries to explain away the growing number of for-sale signs by admitting that “the market’s in an itsy bitsy little gully right now.”
  • Young “garage hedge fund” creators (played by John Magaro and Finn Wittrock) embarrass themselves repeatedly, however finally succeed in their efforts to create a winning fund.

Five Lessons to Take Away from The Big Short.

The Big Short is a mind-blowing story that brings with it warnings we would be wise to hearken. It likewise succeeds in bringing a crucial, complex financial topic to the movie screen. Here are five lessons that we should take away from the subprime tale of gloom:

  1. Leverage can hurt. Increasingly, financial corporations use leverage to multiply their potential earnings, however the leverage can develop into tremendous pain in the markets when conditions are unfavorable. The same lesson also applies to leverage we may personally use in real estate or a brokerage account; leverage can accentuate the losses as well as the gains. However, when leverage is wielded by the largest banks and institutions utilizing derivatives, CDOs (collateralized debt obligations) and other complex securities, the outcome can be catastrophic.
  1. A weak chain link can affect practically every element of the economy. Different aspects of the economy – from banking, stocks, and rating agencies to the housing market and mortgages bonds – are tightly interwoven. What takes place in one sector influences another.
  1. Market optimism won’t guarantee against a crash. Fiscal policy built on nonstop appreciation and expansion can bring the economy onto thin ice. Loosening of credit standards and lending requirements can produce additional money in the economy, however those practices also create bubbles waiting to burst. And just because a majority of investors, money managers, financial experts, the media, and reporters don’t see a crash coming doesn’t mean there isn’t one around the corner.
  1. Contrary to Gordon Gecko’s proclamation in another Wall Street motion picture, greed is not good. Every corner of the finance world– from borrowers to brokerages to rating agencies and government authorities and officials– was incentivized in some way to conceal the cracks in the foundation of the financial system, even as it was falling apart. We should not depend on banking and Wall Street insiders to care more about the stability of the economy than their own bonus checks.
  1. Investors must make sure to protect themselves from risk. Much too often, everyday investors seem to pay the price for the mistakes made by financial corporations along with government regulators (and de-regulators). No matter how “sure” an investment seems, there is always a need for savings. Housing markets and stock markets rise and fall (roller coaster). A portion of every investor’s portfolio should remain in something that grows without fail, slowly and safely, regardless of the economic climate.

The Short Story On The Big Short

The movie is entertaining and rather funny at times, however it never loses sight of the story it is telling. Even as these outsiders succeeded in winning big bets against the housing market, there are no save-the-day heroes or happy endings. Like a financial version of The Titanic, an air of disaster and despair pervades as the financial ship goes down, just as we know it will.

Nominated for Best Picture and Best Supporting Actor Oscars and garnering rave reviews, The Big Short is a big hit. Far more than mere entertainment, it unravels some of the mystery behind why many homeowners, investors, entrepreneurs, business owners, and employees took such a big hit when the subprime debacle crashed the economy in 2008.

Is it worth seeing? Yes. Whether you agree or disagree with its economic analysis, it is an entertaining and thought-provoking film.

The Big Short was launched to DVD March 15, 2016 and is readily available through Netflix and anywhere that DVDs are rented or sold. See the movie trailer on YouTube:

Where is Your Money Safe From Wall Street Excesses and Market Swings?

When a life insurance policy is issued, it is the insurance company’s obligation to make sure that the money will be there to provide benefits and access to cash value, whether the money is needed in year one or one hundred. This is a duty that mutual insurance companies have always taken very seriously. Unlike the stock and housing markets, some things are guaranteed.

Mutual life insurance companies are owned by the policyholders and have no pressure to please investors or shareholders with impressive quarterly reports. On the contrary, life insurance companies have paid not only benefits to beneficiaries, but also non non-guaranteed dividends for over 150 years. Contact me for more info on the best ways to save safely!

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