Provides an understanding of housing bubbles and corrects mistaken concepts in the movie and Lewis' book.

Rating: 7/10 (12 March 2016)

The movie, like the book was a fascinating story of the lives of some of the people who made money by buying swaps on the MBS market during the housing bubble, but neither Michael Lewis, the makers of the movie, nor the people who got rich when the housing bubble burst had any clue as to why the bubble formed, or why it burst.
One example of the lack of comprehension was the "explanation" of the arcane financial instruments used in the MBS market. The lady stated that CDOs that were created by bundling other CDOs were Synthetic CDOs. They weren't; they were CDOs squared. A synthetic CDO was created by bundling Credit Default Swaps.
This is a significant difference because the CDSs didn't require the insured party to own the Mortgage Backed Security that was the referenced security in the swap. This meant that transactions involving Synthetic CDOs didn't cause any money to flow into the housing market. The loss of that money caused house prices to stop going up at an absurd rate, which ended the housing bubble.
Another significant error was the impression given that Wall Street hid bad mortgages in piles of good mortgages, and thereby sneaked them by the rating agencies. That wasn't how it worked. The very bad mortgages were singled out and combined into their own CDO. This CDO paid 14% interest because the borrowers were buying $700,000 houses when their income was $40,000 a year.
The rating agencies rated these mortgages as AAA because THEIR FAILURE RATE WAS ZERO FOR YEARS. The rating agencies role was not to advise investors how to invest their money, but to report accurately the likelihood that the investment would fail.
Those extremely bad mortgages never defaulted because the payments were being made by refinancing the house. If the VALUE of a house increased by 20% or more each year, and the cost of borrowing the money to buy the house was 6% a year, the borrower doesn't have to have any income in order to afford the house.
It was because of the universal belief that the price of houses was going to continue to increase by 20% or more a year that it was possible to create an investment that paid 14%, with no risk that was apparent to anyone on earth. Wall Street just did the mechanical job of creating the instrument that reflected market conditions. They didn't create the bubble, and they didn't understand the bubble any better than anyone else. If the Synthetic CDO had burst the housing bubble a year sooner, Goldman Sachs would have gone belly up because they were long in the market.
The housing bubble came about because, when the stock market bubble of the 1990s burst the stock market gamblers took their money out of the stock market and parked it in interest bearing accounts. This made money cheaper, and mortgage interest rates fell.
When that happened home buyers could pay more for a house and have the same monthly payment, so house prices shot up for a long enough period of time for everybody to believe that they would always increase at that rate.
That is when the segment of housing market developed in which borrowers could buy whatever house they wanted with the expectation on the part of the buyer the loan broker, the lender, the regulators, the Congress, the media, the economists, and the public, that poor people could enjoy the housing bubble benefits as well as rich people, because they could make the mortgage payments out of refinancing the house.
Everybody else could also continually refinance to buy anything they wanted. The economy was great!
The only downside was that all of that money that was being consumed was money that would have been invested in wealth creating, and job creating, enterprises if there had been no misunderstanding about why house prices had gone up for a while when the gamblers parked their money in interest bearing accounts.
By the time the gamblers had found another casino in which to place their bets it didn't make any difference because house prices were then rising at an unrealistic rate because people could make money by owning a house. Making money by owning a house became the dominant reason for owning a house instead of shelter, comfort, a nice view, proximity to employment, and all of the other considerations that set the price of houses in a normal market.
So, the reality is that Wall Street didn't behave badly, rating agencies didn't behave badly, and no one was any more responsible than anyone else for the disaster that was the housing bubble. As Pogo said, "We have met the enemy, and it is us."
Other than having perpetuated a mistaken view of economics that may yet do us in, the movie was great.