How The Big Short enlightened a generation about the 2008 financial crisis
The Oscar-winning 2015 adaptation of Michael Lewis’ book of the same name followed several characters with financial backgrounds in the run-up to the Great Depression of 2007-08. Individuals ended up profiting heavily from the incident, betting on the collapse of the financial system by borrowing with risky mortgages. The film is often credited with explaining the financial disaster in layman’s terms.
The film eventually used characters played by actors such as Selena Gomez, Margot Robbie, and Anthony Bourdain to explain the more complex elements of what was happening using everyday analogies.
Margot Robbie’s character explained mortgage bonds while sitting in a bathtub. The concept behind this was that Robbie would represent the kind of person the community was focused on at the time as the situation collapsed.
The actress noted that the main reason for the collapse was the formation and abuse of mortgage bonds. Mortgages can be fairly stable assets when they’re highly valued – depending on the recipient – but banks started stuffing bonds full of risky (subprime) mortgages to make more money from people investing in the bonds.
Anthony Bourdain then explained CDOs (collateralized debt obligation) through the seafood analogy. A CDO assembles assets such as bonds, car loans, credit card loans, and mortgages to sell to investors. These loans, all from different places, are then combined and sent back to the market as new bonds. Investors in CDOs can buy into different levels of risk, ranging from low to high.
In the run-up to the crisis, some banks began creating and issuing CDOs of risky mortgage-backed securities. However, these CDOs were still rated AAA (i.e. very secure) because the rating agencies believed the number of collateral was sufficient, making it a good choice for investors to bundle multiple high-risk mortgages together.
Selena Gomez and Richard Thaler (Professor of Behavioral Economics) then explained in a further interlude using Blackjack how synthetic CDOs came about. Hybrid CDOs started because there was some early success in CDOs, Bourdain explained.
Banks started creating hybrid secondary CDOs by using different parts of already created CDOs. Imagine a car made from parts from dozens of different used cars. The banks then created synthetic CDOs, the duo explains, which acted as insurance against default on loans in the form of credit default swaps. Amazingly, no one thought the loans would default, which Thaler called the “hot hand fallacy.”
Imagine if Cristiano Ronaldo had scored in many games in a row and people were betting that he has to score in every game now. People made this bet and people made side bets that this person would win their bet. This process continued. Eventually Ronaldo didn’t score in a game (people couldn’t pay their mortgages) and things plummeted. The people who made money The great short film Bet on this tumble using a mechanism known as shorting.
Simply put, someone shorting is borrowing shares from someone who agrees to return them on a specific date. That can be days or years. After the exchange, the short seller sells the stock in the market – say for $1000.
On the day the short seller has to pay, he buys back the same stock in the market but imagines that the value has now gone down, instead of still being $1000 and now worth $200. That is, the shorter buys back the stock and delivers it to whoever they borrowed it from while retaining $800 of profit.
This eventually happened to numerous characters in the film, but on a larger scale.
Industry adaptation due to the film
Confer Inc. Founder and CEO, Yatin Karnik, has over 20 years of experience in the mortgage industry and was active during the time the film was set. She spent nearly 17 years at Wells Fargo before joining Confer in 2021.
Confer has developed an optimization engine that can customize mortgage loans via Web 3.0. The aim is to put the borrower in a kind of negotiating position with the lender.
The app compares official loan estimates and recommends a lender best suited to the borrower’s situation, while changing the terms of the mortgage transaction to spit out a better deal.
Karnik said of the project: “My goal is to democratize finance worldwide, not just within the United States of America.”
“This goal means making money easily accessible to those in need and those seeking credit. In addition, it will be made affordable, available and transparent to lend/borrow money.”
“The lack of affordable financing impacts the poor and underprivileged communities as they lack access to the necessary funds. People saw that in all its glory throughout the film.” He added.
“My mission is to make money easily accessible to those who cannot access it.”
Incredibly, there weren’t many legitimate changes to procedures after the crash, other than a little more safety regulations.
Confer and other companies are hoping to change that with blockchain and the new digital age so it doesn’t happen again The great short film.
Karnik continued, “I really want to change the antiquated way the financial industry currently works — which adds unnecessary layers of administration, doesn’t allow for clarity and the true choice of borrowers, and glaringly lacks the implementation of government guidance.”
“There are glaring gaps and a lack of standardization in the consumer credit landscape. My goal is to bring these crater-sized potholes to light and ensure leaders across the board are held accountable for their responsibilities to the American public.”