The Big Short (#3 of 52)

Once upon a time, watching movies at home on your computer (laptop/desktop/whatever) was supposed to be the next big thing. With various convenient formats (CDs/DVDs/USBs – take your pick based on how old you are) each of which was the next big thing, I guess people imagined it’d be doomsday for the cinema hall owners.

Well that hasn’t quite happened has it? In fact as I’ve grown older (and I like to think of myself as a reasonably early adopter-ish representative of my generation), I’ve actually found myself watching lesser and lesser movies at home. Sure you occasionally catch bits and pieces of something on TV but I’m not counting that unless I ‘block time’ to use corporate parlance and watch it from end to end. I have the broadband connection, the 1 terabyte hard disk, the laptop lying around the house but I can’t recall the last time I was keen to watch a movie outside a cinema hall unless I was travelling.

Part of this is probably because once you start working you can afford to visit the uber expensive multiplexes of modern Indian cities more often, but I think the other reason is the millions of distractions at home. Sure there will be these when you’re staying with a large family at home and there’s a common desktop computer which four people are vying for but even if I’m home alone these days – I find them to be too many what with the smartphones, TV sets, messengers, emails and your laundry-man ringing the doorbell right when the shower-curtain is about to be pulled back by the masked murderer on screen. Oh for the escape to a dark sanctum where you’re on your own and thoroughly ‘engaged’ (HR speak again [:-/]) is something which can’t be replicated.

So I’ve realised there’re two categories of movies which I’ll probably end up watching at home – the one’s which don’t release in India (or get a mainstream release, a 600 rupee ticket at PVR Ambience does not count) and the second one which I’m toying with adding now – those with too many cuts which may take away from the experience of watching it in a cinema hall. ‘The Big Short’ falls in category 1 I’m guessing. This movie had an entertaining promo but also had real potentials to ‘learn from’ which I’m embarrassed to say is what excites me these days.

It is essential to now not throw away whatever I learnt, so I intend to break down the story of the movie for me in great detail to quickly brush up on when I forget again (never know which job interview this may come in handy ;)).

So the year is 2005 or there abouts. We’ve got three parallel tracks running. Christian Bale is Dr. Bury, a nerdy OCDish guy who is the financial equivalent of a science nerd. You have 2 younger guys (don’t know their names) who run a garage-hedge-fund and are mentored by a neurotic Brad Pitt. And you have a cocksure bank employee (Ryan Reynolds who does his usual stuff) whose dealing with Steve Caroll (wonderfully different role) who is a righteous yet slightly psychotic investment banker who also in a weird kind of way works for a big bank.

At the cost of making a fool of myself, the following is purely my understanding of what went down (note to future self: this is not necessarily right):
– Bank gives loan to people who want to buy house
– People keep house as mortgage
– Banks start to ask investors to invest money for these mortgages
– If loan fails, investor keeps the property, else he gets interest on his loan
– Bank charges a commission on this deal for putting these in connection
– Instead of individual loans, banks start to bundle up these mortgages – so that institutional customers invest money for them instead. This is called a ‘Collateralized Debt Obligation’ (right?)
– Now originally loans only given to people with good credit rating – these are ‘prime’ mortgages
– However as demand for these CDOs increase, banks start offering loans to people with not so good credit ratings. These are called sub-prime mortgages
– Each CDO made of many smaller mortgages – so even if some fail it should not affect the overall payoff
– However with time more and more poor-credit people also get loans
– There is a funda of adjustable rate as well which will kick in if the loans can’t be financed on time. So people basically taking loans to pay loans?
– No one looks at the contents of the bundled mortgages in detail assuming property rates will continue to go up
– Ratings agencies also keep giving them a high rating
Now these 3 groups above, figure this out. They also realise this a ticking time bomb by actually studying the contents of these packaged mortgages. They figure out at some point of time these loans are going to go bust. Therefore these packaged CDOs will also collapse. They therefore bet against them (don’t ask me how!) through something called ‘swaps’- this is called shorting.

– Banks create something called swaps – these will pay off if the CDOs collapse, this is essentially like insurance where you get payoff if someone dies
– However until time they keep increasing, the premium on these swaps will also keep increasing
– Over a period of times people start defaulting on loans
– Logically this means that the CDOs value should go down
– However this does not happen because for the banks this would be an admission of having screwed up
– So the rate continues to rise, premium on these swaps keeps increasing
– Ratings agencies are also ‘bought into this’ and hence they also keep rating these CDOs very highly
– People also take loans on loans – leading to something very complicated shit going down and no one knowing what it is

After a fair deal of drama, showing how corrupt and connected the system is, how much hubris the bankers and everyone involved essentially really had and how our heroes are really heroes – the collapse predicted by everyone does happen.

– This is because basically ‘the housing bubble bursts’. What this means is the value of the houses goes down. Therefore it does not make sense for the house-owners to keep paying loans on their houses, even if they default and the bank seizes the property they’re okay with it.
– The bank however is also being saddled with tons of ‘housing’ which has very little value
– This leads to the banks also bleeding and because US economy is connected to the world economy, financial Armageddon happening
– Were the banks stupid to do this? Essentially, no because they knew the governments would put in their own money and bail them out – they were too big to fail

Loved seeing a lot of the key actors in the kind of roles we don’t see them in too often. The film makes a genuine attempt to dumb things down (okay ‘simplify’ them) for the audience through a lot of breaking of the fourth-wall kind of stuff. And although it’s still probably to complicated for most average-Joe’s – it does provide an insight into the kind of humongous fraudulence that happens at that level. And also that no one really knows what is going on in Finance. Ever.

Happened to read a similar piece at the right time, about the rise and fall of the East India Company some 200 + years ago by William Dalrymple where he draws a lot of parallels between the two events, a must read to provide further perspective.

Okay, that ends today’s finance/history/geography lesson. The movie – a solid 4 stars please.



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