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January 5, 2016 5:50 AM Age: 5 yrs

Long on The Big Short

Category: AC - Billboard, A/F Commentary & Opinion, CM Commentary & Opinion, ERM Commentary & Opinion, Ethics Commentary & Opinion, CFR Commentary, ESG Highlights, ESG Highlighted Commentary, AM Highlights, AM Highlighted Commentary
Source:  Larry Checco

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If, like me, you went to see the movie The Big Short over the holidays and didn’t walk out of the theater apoplectic—especially if your world was turned upside down as a result of the housing bubble and Great Recession that immediately followed—it’s time for a full psychological workup.

For those who haven’t seen the movie, I’d offer a spoiler alert, but what’s the point?  We all know the ending—millions of Americans lost their homes and jobs.

To stay afloat financially, many families went through their life savings and retirement funds, as well as the money they had set aside for their kids’ educations—and still sunk into debt.  Some lost their health; some even their lives.

So why did this tragedy happen?  I think the movie gets it right.

“No one is paying attention,” Ryan Gosling’s character, says.  “The rating agencies, banks, the government.  They’re all asleep at the wheel.” 

Which begs the questions: How did a handful of oddball outliers, around whom the movie revolves, outsmart smug, hubristic Wall Street types, as well as go against all the forecasting predictions of government watchdog agencies and make a killing on shorting the housing industry?

The movie gets it right again.  “All they did was look.” 

No fancy economic forecasting models, no army of economists, no complicated mathematical equations.  They simply looked.  They unbundled pooled assets, called collateral debt obligations, or CDOs, and realized that what the rating agencies were awarding AAA status to were loaded with crappy subprime variable interest-rate mortgages that when they reset would drive many homeowners into foreclosure. 

One hedge fund team bent on shorting the market purposely took a trip through high-end Florida neighborhoods and saw the proliferation of “For Sale” and “Foreclosure” signs.  They talked to people—including one stripper who owned four houses and a condo—and realized these folks were way over their heads in debt.

In short, they used commonsense, empirical approaches that every government regulatory agency we rely on to protect us from financial abuses failed to employ.

“The system f%$# up in a big, big way,” says one of the movie’s characters. “The system is fueled by stupidity,” says another.


After reading one of my columns ( one former member of the Federal Reserve System Board of Governors, wrote back to say “I think all (the regulatory agencies) were lulled (italics mine) by two decades of relatively benign economic developments.” 

Problem is those couple of decades included the Savings & Loan Crisis, which in 1996 the General Accounting Office estimated the cost to taxpayers to be $132.1 billion, as well as the Dot.Com Bubble that from March 2000 to October 2002 caused the loss of $5 trillion in the market value of companies, decimating the savings and retirement plans of a lot of working-class folks. 

“What’s that smell?” Gosling’s movie character asks.  His answer, licking his chops: “Money!”

Whenever there are large sums of money involved—and there always are—our regulatory agencies can’t afford to be lulled.  As taxpayers we expect—and should demand—vigilance.  And when fraud and malfeasance is found, we should demand justice, which we saw little, if any of, in this last crisis.

Instead, Wall Street got a bail out.  And who paid for this financial mess?  The movie is correct again.  “Immigrants and poor people”, plus a lot of ordinary folks like you and me.

In one of the final scenes set in Las Vegas, Steve Carell’s character, who is the closest the movie comes to having a hero, abruptly gets up and walks away from a meeting with his colleagues.

“Hey, where are you going?” one asks.

“I’m going to seek moral redemption at the roulette table,” he says in disgust.

Say no more.

Larry Checco

© 2015



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