Entrepreneurship vs. Wall Street and Washington

Review of “The Big Short”

Michael Lewis’s book The Big Short is among my favorites. When it was announced Adam McKay, the director of “Talladega Nights” and “Anchorman,” was directing the film version of what I consider Lewis’s second masterpiece (the first was Liar’s Poker) I shuddered, remembering the cinematic debacle that was made of Tom Wolfe’s Bonfire of the Vanities.

Happily McKay didn’t make a mockery of Lewis’s work, although, at times, he tried. Lewis admits he’s baffled by Hollywood  and didn’t expect “The Big Short” to be made for the screen. It’s more than ironic the movie begins with the primary subject of Liar’s Poker, Lewis Ranieri, who created mortgage-backed securities (MBS).

Very quickly the story jumps to 2005 and Dr. Michael Burry (Christian Bale). Bale plays Burry in all the character’s Aspergery quirkiness  (although his condition is never mentioned in the movie or by reviewers). Socially awkward, incapable of understanding analogies and metaphors, Bale nails the essence of the portfolio manager who read the collateralized debt obligation (CDO) legal documents cover to cover with his one eye. He alone understood them to be trash wrapped in nice, shiny Wall Street wrapping. The Big Short: Inside ... Michael Lewis Best Price: $1.49 Buy New $5.75 (as of 12:05 EDT - Details)

There was no way to bet against the housing market until Burry went to Wall Street firms asking if they would sell him credit default swaps (CDS), which are essentially insurance policies that pay off with the failure of Collateralized Debt Obligations (CDOs), the close cousin of MBS: Hundreds of mortgages piled together into a impenetrable goulash baked by Wall Street salesmen to exploit the housing boom, promising large yields with gilt-edged status bought and paid for from the ratings agencies.

The scenes of smug Wall Street bankers snickering at Burry’s proposition are especially poignant. The geek obviously didn’t realize housing never goes down in value. Alan Greenspan said so!

Lewis’s other characters appear in the movie (although under pseudonyms). Steve Carrell plays the obnoxious Mark Baum who (with his team) took some convincing that betting against America was wise.

One of the strengths of the movie has his team hitting the road, touring vacant subdivisions in Florida, and talking to a renter whose landlord was 90-days behind on his mortgage. “That’s not going to be a problem for me, right? I’m current on my rent.” Baum’s assistant could only say, “You might want to call him,” as he looked down at the man’s young son.

Baum took his research far enough to interview a stripper during a lap dance. While she wouldn’t stop gyrating (club rules) to talk to him, she does manage to admit to the portfolio manager she owned five homes and a condo, all fully leveraged.

Baum suddenly smelled the coffee.

I suppose the idea of a stripper owning six properties will shock some moviegoers who will assume that part of the story is fiction. It’s not. Let’s just say in my mid-2000s research in Las Vegas strip clubs, real estate was the primary topic of conversation, to the extent there was conversation.  Plenty of girls even left the jiggle business (where they were making hundreds if not thousands a night) to sell real estate or become mortgage loan officers.

The Bonfire of the Van... Tom Wolfe Best Price: $2.28 Buy New $12.09 (as of 10:15 EDT - Details) Burry, Baum and the others couldn’t just sit back and wait for the housing crash to manifest. Credit Default Swaps are like insurance policies and the owners must pay premiums.  From 2005 to 2008, despite the obvious deterioration in the housing market and increase in mortgage delinquencies, Wall Street would arbitrarily increase the price of the MBS and CDOs, thus squeezing these gutsy investors for more premiums and sometimes more collateral.  There would be no real price discovery until Wall Street built a position on the short side of the market.

Dr. Burry’s investors treated him like an idiot. They wanted their money back. They threatened to sue. Baum’s risk manager insisted that he sell his position. It’s stunning that these characters remained resolute in their conviction that they were right and the rest of the investment world, and the Fed’s talking heads, were wrong.

“So Mike, you’re a guy who gets his hair cut at Supercuts and doesn’t wear shoes, and YOU think YOU know more than Alan Greenspan?”

Baum’s sushi dinner with a head of CDS for a big bank is another moment exposing the lunacy of the market. There wasn’t enough mortgage product to bet for and against, so synthetic CDOs, CDS and CDO squared were created, all based on a relatively tiny number of mortgages.

McKay uses cameos with uneven success to explain these obscure financial instruments. The unlikely pairing of behavioral  economist Richard Thaler and Selena Gomez sitting together playing blackjack is used to explained the synthetic mortgage products. Gomez’s actual blackjack hand serves as the basis for millions in bets on the outcome among people standing behind her and Thaler.

The director splices in portions of mid-2000s commercials and music videos, along with popular songs of the time, like Ludacris and Pharrell Williams’s “Money Maker,” that unfortunately do nothing to advance the story and give the movie a kitschy feel.

What the movie does effectively is show that no glory is gained, or praise received, for being right. Yes, this handful of investors got rich, but as Burry wrote in an email to his investors, he had had no contact with any of them except through their lawyers despite earning them nearly 500% on their money.

Liaru2019s Poker (Nort... Michael Lewis Best Price: $1.49 Buy New $6.00 (as of 12:05 EDT - Details) At the end moviegoers are supposed to be outraged at Wall Street’s greed and fraud. Brad Pitt’s character Ben Rickert goes on sanctimonious rant after making millions with a couple young investors.  “You just bet against the American economy,” he shouts, and goes on to spew about lost jobs, lost houses, and shattered dreams.

McKay then makes a point to highlight that only one person went to jail: Some nobody who just did what everyone else was doing.   The Lehman Brothers failure is portrayed in dramatic fashion, but the ensuing bailouts get barely a mention. And, the Fed isn’t part of the story at all.

It is the entrepreneurial genius and chutzpah that really shines through in “The Big Short.” Without the creation of credit default swaps making it possible to bet against accepted wisdom, the market would be more warped than it still is.  Entrepreneurship is as much about guts and conviction as it is about Carl Menger’s insights of leadership, alertness, and risk taking.

After brief “where are they now” summaries scroll on the screen, moviegoers are left with the message that a new product is being offered on Wall Street that are CDOs but called by a different name. The message is clear, another financial mess is on its way.

Maybe so. Here in Las Vegas, The Mandarin Hotel is selling condos for $1,600 per square foot, land prices have reached boom-time highs again, all while Zillow reports that 41% of Las Vegas homeowners are “effectively” underwater.  A local  appraiser recently told me, “It’s just crazy again. Nobody remembers 2008.”

The Fed’s cheap money makes memories short. And while the public flocks to “Star Wars,” sadly, McKay’s movie and Lewis’s story is relegated to preaching to the choir.