This is the first film review I've done. I briefly dabbled in review writing in a magazine that I used to put together at school, until we got a rather caustic letter from one of the people in the play I had reviewed saying, "the only thing worse than amateur dramatics is amateur criticism." So read on at your peril!
The real story here is not about mortgages, but about shadow banking: financial institutions beyond the regulations of traditional banking. This steadily increased through the 1980s, speeding up in the middle of the 1990s, and by 2000 there was more money in shadow banking than in traditional banking. To take a extremely pessimistic view, this is like betting that you have a dozen broken eggs when you only have a box of ten eggs. And you are betting with the eggs.
So what does this have to do with building a house then? Well, perhaps not very much, but when you are borrowing money, you might want to know where it comes from. Remember the Adam Smith line: if you owe the bank a hundred pounds then you have a problem. If you owe the bank a million pounds, then the bank has a problem.
Anyway, on a scale of one to three, this movie definitely gets a three.
Film reviews have even less connection with low energy building than the nonsense I usually write, but this movie was about mortgages, and they have everything to do with building houses. Without financing, low energy buildings will not get off the paper, and unless you have extensive savings, or you are going to spend ten years building your house with the remains of your pay, you will be going to the bank to borrow money. If you are in Japan it makes financial sense to get a loan from the bank even if you have the money since you get a tax rebate for having a mortgage, but I digress from the content of the film.
The Big Short (2015) is based on actual events leading up to the economic crash of 2007 and 2008. For anyone who missed it, mortgages were considered as safe as houses for the banks lending money, while in the real world brokers were getting paid bonuses for giving as many mortgages out as possible, even so-called Ninja loans to people with no income and no assets.
As I was getting my loan in Japan I had heard of people going to the bank and being handed actual cash from the bank manager, which they passed across the table to the landowners or the people building the house. In more "developed" economies, this money is just numbers on a computer somewhere. The bank is not lending you money that they have taken out of their safe and can count in front of you, but they are adding numbers onto a balance sheet somewhere.
This makes sense so far, but the money needs to be balanced with assets. In a deregulated financial market, these debts are bundled and sold as mortgage bonds, then traded and tranched, tranched and traded. The movie has a nice scene with Jenga blocks representing the debts, and does a very good job at explaining financial concept in a clear and engaging way.
The Big Short follows four people who realised that a lot of the mortgages were not being paid back, and the bonds were being given more credit than they deserved. So they started investing money into the loans having too high a credit rating. This is the part I don't really understand.
Financial institutions have a whole range of jargon that makes things very difficult to understand. There are two reasons something sounds difficult to understand. One is that it is a complicated system that inherently is difficult to understand. The other is that someone is bullshitting, to separate you from your money, or to keep them out of prison, or both.
I understand investing in a house or in land, since that has intrinsic value. I understand investing in stocks and shares because those businesses generate wealth. I understand investing in commodities. I understand that governments sometimes want to generate money and they will issue bonds, and I guess the countries they represent have value. I also understand that these things can be bundled together into funds. But when I hear of "financial instruments" like "structured investment vehicles" alarm bells start ringing. I know those terms are designed to make our eyes glaze over.
The people who saw the impending collapse of the mortgage world put money into something called a Credit Default Swap, which is a regular payment that may lead to a payout if a loan defaults. I think I pay something like this for my own house loan.
So I suppose I do understand what is happening here, I just don't understand why it is allowed to happen, especially with people's life savings. Putting money into something being valued too highly is gambling. This should be in Las Vegas, not Wall Street.
There is a precedent in insurance. Shipping was a dangerous business, and people could pay premiums to insurance brokers in return for large payouts if the ships sank and the cargo was lost.The idea goes back to the ancient world, and for example the Code of Hammurabi made provision for an extra payment on a loan so it would be cancelled if a cargo was lost. The first insurance policy independent of the loan goes back Genoa in 1347. The modern insurance industry grew out of London and you may have heard of a Mr Lloyd, who had a coffee shop there in the late 1680s frequented by ship owners. For a while anyone could take out an insurance policy on a ship being lost, but during the 19th century, there were problems with people gaming the system, leading to the Marine Insurance Act of 1906 and the concept of "insurable interest". This means that you can only insure against losing something if you have an interest in keeping it. The Life Assurances act of 1774 is an earlier example of this concept.
Nothing about insurance is in the movie, but it seems a hundred years later this idea had been forgotten, and so a group of investors were able to walk into Wall Street banks and effectively place these bets, which were later turned into financial instruments and sold to other investors.
The movie tells this story well, focusing mostly on four investors who saw the crisis coming. I like the way this film is billed as a comedy. Perhaps they wanted Jim Carrey for the Christian Bale character, Jack Black for Brad Pitt, and Ben Stiller for Ryan Gosling.
I rolled off the couch laughing when the Brad told us that 40,000 people die every time unemployment goes up 1%.
The few people who made millions out of banks failing may be quite amused. The people involved at every level with the irresponsible lending habits leading up to this crisis, who still have their salaries and bonuses, must be laughing all the way to the bank. Where they still work.
One counterfactual idea strikes me though. What if, instead of trying to make money out of it, those clairvoyants had pushed the credit raters to look a bit more closely at the assets and start downgrading them? In fact, could their investment into the mortgage failures have helped the collapse?
A house of cards will only fall down if you knock it, and to be honest since we came off the gold standard in the 1930s our whole economy has just been based on bits of paper. More recently it has been bits in a computer somewhere.
So is that the joke at the heart of this "comedy"? I'm still not really laughing yet.
It's tempting to look at the four heroes of the story as important players in a financial system that is trying to buffer against risk, who helped expose problems in ratings of the mortgage industry. But it's more likely that they were out to make money from insurance payouts that in a moral system would have gone to people who had lost their savings or their homes, and that they were very much a part of the shadow banking system that still seems way too big. Rather than addressing the problem, they gave banks the opportunity to sell trillions of dollars worth of bets that the mortgage bonds would not fail.
So what does this have to do with building a house then? Well, perhaps not very much, but when you are borrowing money, you might want to know where it comes from. Remember the Adam Smith line: if you owe the bank a hundred pounds then you have a problem. If you owe the bank a million pounds, then the bank has a problem.
Anyway, on a scale of one to three, this movie definitely gets a three.
Let me leave you with some words Woody Guthrie sang in the 1930s:
"The gambling man is rich and the working man is poor
And I ain't got no home in this world any more"
Notes and References
The relationship between unemployment and death was not a joke, and data can be found on page 300 of Thomas, W. L. and Carson, R. B. (2014) The American Economy: How it Works and How it Doesn't, Routledge.
See also: TUC (2010) The Costs of Unemployment, a TUC Briefing to Mark the European Year for Combating Poverty and Social Exclusion.
Östring Lilja, Sara (2010) Insurable interest in marine insurance: A necessity or an obsolete way of thinking?
