An Entertaining and Insightful Look at 2007-2008 Financial Crisis

Rating: 9/10 (11 December 2016)

I enjoyed reading Michael Lewis' "The Big Short" several years ago, and was curious to see if Hollywood would be able to convert into a coherent and entertaining film a book about an unusual set of "eccentric" investors "shorting" (betting on a fall in price) of various arcane financial instruments connected to housing values. Well, I saw the DVD recently and the filmmakers have succeeded admirably. This might be the best film about the 2007-2008 financial crisis on Wall Street that I've seen. In fact, it might be the best film about high finance and Wall Street since Oliver Stone's "Wall Street." I give the director, Adam McKay, high marks for not "dumbing down" the material in Lewis' book, and explaining in clear and visual terms complex topics like mortgage-backed securities and tranches of securities. There's a marvelous Jenga Block demonstration of the fragile and vulnerable nature of securities piled on securities with each security's value "derived" from the value of a prior security (a derivative), and with all the securities' value ultimately dependent on home values; and as we know, home values always go up, and never decline! So, poor cash-strapped mortgage borrowers can always refinance when their adjustable-rate mortgages are unlocked. The lenders don't care because the collateral never declines in value, and anyway, they've sold the loan, via its placement into a pool of securities, to an unsuspecting yield-hungry investor.
Well of course, a "bubble" developed in housing values from a variety of reasons, and once mortgage delinquencies increased and the bubble was punctured, housing values commenced a precipitate decline and all these mortgage-backed securities began a free fall. Perhaps it takes the kind of "eccentric" investors, depicted in both the book and the film, to run against the tide of authoritative opinion of the big Wall Street banks, the rating agencies, the government, and the Federal Reserve, and challenge this complacent consensus. In fascinating scenes, the film shows their research: a stripper in a hot market area reveals she's financed five properties for flipping, a renter in a new low-end development faces eviction because his landlord / owner hasn't made a mortgage payment for over three months, and mortgage brokers laughingly tell about the mortgages they've secured for borrowers with no assets and no documented income. The film uncovers these economic clues that presage the impending crisis amid the hyperactive and profane actions of these odd-ball (but prescient) investors; as one reviewer suggested, they seem to be on a steady diet of Red Bull.
As we see at the end, their short positions in these mortgage-related securities have been vindicated and have earned them huge profits, but one of them sympathetically muses that sure we've made a lot of money but its essentially because home values have collapsed, banks have failed (and been merged or bailed out), the stock market and retirement values have crumpled, unemployment has risen drastically, and this economic misery for many has made us millions. There's no doubt that the incentive structure and excesses of Wall Street substantially contributed to the unsustainable housing market bubble; thus, its ironic to note that as I write this (December 2016) the news reports indicate that the new administration will soften considerably the already lobbyist-weakened Dodd-Frank financial reform law.