The Big Short

In 2005, a fund manager in California called Michael Burry does something nobody else in finance appears to have bothered doing: he sits down with the loan documents behind America's mortgage bonds and reads them, line by line, thousands of pages of them. A former doctor, barefoot in his office with heavy-metal music playing, he is not a natural salesman and does not pretend to be. What he finds is simple. Enormous numbers of the home loans packed inside these supposedly safe bonds have been made to people who cannot afford them, on cheap introductory rates that are about to jump. When the rates jump, the borrowers will default in waves.

So he asks the great banks of Wall Street for something that does not yet exist: a way to bet against the American housing market. They are delighted. They design the contracts for him and take his money, and behind his back they laugh at him — the housing market has never fallen nationally, so as far as they are concerned he has volunteered to pay them a fee every month for nothing.

The trouble is that he must keep paying. Month after month, the loans go bad exactly as he predicted and the bonds do not move, and his own investors watch their money drain away on a bet against the impossible. They are furious. They want out. Burry, certain and completely alone, refuses to let them go.

Word of the strange trade spreads. A slick bond salesman, Jared Vennett, realises there is a fortune to be made not in making the bet but in selling it to other people, and a wrong number puts his pitch in front of Mark Baum, a permanently furious fund manager who runs a small team inside a large bank and who despises the industry he works in.

Baum's team go and look. They drive through half-empty new housing estates in Florida where the gardens have gone to weeds; they find a tenant who has no idea her landlord has stopped paying; they sit in a bar with two mortgage brokers who cheerfully boast about lending to people with no income, no job and no documents, because nobody ever asks. At an industry conference in Las Vegas, Baum has dinner with a man who manages the products built out of the very worst of these bonds, and who explains — pleasantly, without embarrassment — that when the good bonds run out he simply repackages the bad ones, and then creates fresh side-bets on top of them, so that the same weak loans can be sold again and again to people who will never see them.

Baum works out, sitting at that table, that the fraud is not hidden in the machine. The fraud is the machine. Elsewhere, two young investors running a tiny fund out of a garage stumble on the same idea, and with help from a retired banker who long ago walked away in disgust, they buy the same protection on the bonds everyone considers safest — the cheapest bet of all, and the one that pays most if the whole thing goes.

Through 2007 the loans fail on schedule — and still the bonds hold their value. This is the part that breaks the characters. The market is not simply mistaken; it is being held up. Ratings are not cut, prices are not marked down, banks quietly sell what they can before admitting what they own. Burry, under siege from his own investors, locks the fund and waits. Baum, watching the machine refuse to die, becomes convinced the whole system will be allowed to collapse before anyone tells the truth about it.

Then it goes. Ratings tumble, the price of the protection explodes, and a new fear arrives with the profits: the banks that sold these bets are the same banks that now have to pay them, and some of them may not survive long enough to do it. In September 2008 one of the oldest firms on Wall Street files for bankruptcy, and the young investors walk through its emptying offices watching people carry boxes to the lifts.

The film refuses to let anyone enjoy the win. When the two youngest men celebrate, the retired banker turns on them: what they are cheering, he says, is millions of ordinary people losing homes, savings and jobs. Baum, sickened, holds his position until the last possible moment and then sells without a word of triumph. The closing captions are colder still. The banks blamed immigrants and poor people. Almost nobody went to prison. The taxpayer paid. And within a few years the same instruments were quietly being sold again under a friendlier name.

The pool needs mortgages. Once every reliable borrower already had one, the only way to keep the machine running was to lend to people who could not repay. Subprime lending grew from around $65 billion in 1995 to something in the region of $173 billion by 2001, and kept climbing. Between 2004 and 2006 the share of the American mortgage market taken by exotic products — interest-only loans, option adjustable-rate mortgages, forty-year balloon loans — rose from roughly 7 per cent to about 29 per cent.

These loans were designed to look affordable for two years and then reset upwards. That reset date is the entire thesis of the film. Burry did not predict a mood or a panic; he read the paperwork, found the dates, and worked out when the payments would jump. The film's version of him reading thousands of pages of prospectuses is not a flourish — it is the point. Almost nobody else did it.

None of this could have been sold without a top credit rating, and the Financial Crisis Inquiry Commission — the official US investigation — was blunt about who supplied it. The three big rating agencies, it concluded, were "key enablers of the financial meltdown" and "essential cogs in the wheel of financial destruction"; the securities "could not have been marketed and sold without their seal of approval."

The scale is hard to take in. Moody's alone rated nearly 45,000 mortgage-related securities as triple-A between 2000 and 2007. In 2006 it was stamping that grade on roughly 1,500 securities every working day — and 88 per cent of the mortgage securities it rated triple-A that year were later downgraded. The conflict of interest was structural: the agencies were paid by the banks whose products they were grading, and a bank that disliked its rating could walk down the street to a competitor. Years later, S&P paid about $1.375 billion in a February 2015 settlement without being required to admit criminal wrongdoing, and in January 2017 Moody's paid nearly $864 million to the US Justice Department and a group of states.

Michael Burry is the only major character whose real name the film keeps. A doctor who left medicine for investing, he founded Scion Capital, turned his attention to the subprime market in 2005, and bought credit default swaps against mortgage securities from firms including Goldman Sachs. The investor pressure in the film is real: he faced an investor revolt from clients who were convinced he was wrong and demanded their capital back. He was eventually vindicated — a personal profit of about $100 million, and more than $700 million for the investors who stayed. He shut Scion Capital down in 2008 anyway. In April 2010 he wrote a piece in The New York Times under the title "I Saw the Crisis Coming. Why Didn't the Fed?"

Steve Carell's Mark Baum is Steve Eisman, who ran a fund at FrontPoint Partners, a Morgan Stanley subsidiary, and bet heavily against subprime mortgage products. Ryan Gosling's Jared Vennett is based on the Deutsche Bank salesman Greg Lippmann; Brad Pitt's Ben Rickert on the retired trader Ben Hockett; and the two young men on Charlie Ledley and Jamie Mai of Cornwall Capital, who really did start from almost nothing.

On 15 September 2008, Lehman Brothers filed for Chapter 11 bankruptcy with over $600 billion in assets — still the largest bankruptcy filing in United States history. The Dow Jones closed down just over 500 points that day, a fall of 4.4 per cent.

Then came the part the winners were cheering. The recession ran from December 2007 to June 2009 — eighteen months, the deepest downturn since the Second World War. US GDP fell 4.3 per cent. Unemployment more than doubled, from under 5 per cent to 10 per cent. Between the start of the recession and the employment low point in February 2010, the American labour market lost 8.7 million jobs. House prices fell by more than a fifth nationally between early 2007 and mid-2011. CoreLogic counted approximately 7.8 million completed foreclosures between the beginning of 2007 and the end of 2016, and around 8.6 million homes lost to foreclosure since home ownership peaked in 2004. The Federal Reserve Bank of Dallas put the total cost at somewhere between $6 trillion and $14 trillion — the equivalent of 40 to 90 per cent of a full year's national output, or $50,000 to $120,000 for every American household.

And the accountability? The banks paid: Bank of America alone agreed to $16.65 billion with the Justice Department in August 2014. The individuals did not. Kareem Serageldin, a former Credit Suisse managing director sentenced in November 2013 to thirty months for inflating the value of mortgage-backed bonds, is the only banker in the United States who went to prison as a result of the crisis. The Commission's own verdict on all of it was unambiguous: "We conclude this financial crisis was avoidable… the result of human action and inaction, not of Mother Nature or computer models gone haywire."

This is the unusual, honest thing about The Big Short: it tells you. It stops the story and hands the explanation to a celebrity — Margot Robbie in a bath explaining mortgage-backed securities, Anthony Bourdain using three-day-old fish in a stew to explain a CDO, Selena Gomez at a blackjack table with the economist Richard Thaler explaining synthetic CDOs — precisely because it knows you would otherwise stop listening. Then characters turn to the camera and grade their own scenes. One admits that the young investors did not really find the pitch in a bank lobby: they say so, and add that the invented version is more fun. Another confirms that a particular wrong-number phone call genuinely happened.

Some changes it does not flag, and they are worth knowing. Almost every name was changed; only Burry's is real. The suicide of Mark Baum's brother stands in for a real bereavement in Steve Eisman's life — the death of his infant son — and the substitution was made at the family's request. Timelines are compressed, and the danger to Morgan Stanley is dramatised harder than the record supports. The closing captions, though, are accurate in spirit and in substance: within a few years banks were selling a product called a "bespoke tranche opportunity", which is a CDO with a new name on the box.