A quartet of central characters, drive the plot of The Big Short, as they uncover the extent of the sub-prime mortgage scandal in the USA in 2007. Without one main protagonist the story lacks a clear focus on a single narrative but makes up for it by illustrating the unravelling scandal with graphics, straight to camera explanations and the odd celebrity appearing in cameo roles to further convey the financial mechanics. There’s Selena Gomez on a gaming table in Las Vegas, Margot Robbie appears in a Bath and even the chef Anthony Bourdain makes a fish stew to illustrate subprime mortgages.
Calling the bluff of the banks
The reason for the 2008 Credit Crunch and the essential truth behind Adam McKay’s movie is a banking fraud. Lenders bundled up mortgages into packages and sold them to banks who in turn sold them to other banks. The mortgages contained the odd defaulter but as the practice increased more unsuitable mortgage deals were included to increase bonuses to the point that the bundles became worthless as too many mortgages were defaulted on. The dodgy practice continued as banks knowingly over valued the bundles of subprime mortgages until broker Michael Burry of Scion Capital (played by Christian Bale in the film) – who had a reputation of spotting a stinker – bet against the continued increase in value. He went to the banks and arranged a bet, or a short*, that the values would fall. To do this he had to pay regular premiums to the banks which they were happy to charge as they thought he was nuts.
Burry and later others brokers such as Mark Baum (Steve Carell) of Front Line Partners began to investigate and do the same after undertaking research including a Florida field trip that revealed on one estate nobody was paying their mortgages. Once the secret was out the value of the banks fell off a cliff.
The day the shit hit the fan
In 2007 New Century Bank went bust, American Home Mortgage filed for Chapter 11 protection and in the UK there was a run on Northern Rock which showed how the crisis rippled out around the world. More followed with Bear Stearns, Citigroup, Bank of America and JPMorgan Chase all in trouble with Delta Financial Corporation filing for bankruptcy by the end of the year. In 2008 it got worse as the stock market fell and the banks called in loans to businesses across the USA leading to insolvencies and a huge rise in unemployment. George Bush’s Government pushed through rescue packages and ended up bailing out Bear Stearns and the banks Fannie Mae and Freddie Mac although the crisis continued taking the scalp of the Lehman Brothers the damage was done. Later that year Barack Obama become president and his administration injected massive amounts of cash into the economy which eventually proved a success. The subprime mortgage scandal had once again showed that unregulated investments and a collective will to ignore a growing crisis nearly took the USA economy down.
The Big Short is an intelligent and enjoyably testosterone powered movie with its rock tracks, shouty moments, foul language and quick fire direction. Yes it gets a bit pious towards the end (because the brokers all get very rich but still take the moral high ground over the corrupt bankers) with an unresolved sub-plot concerning Baum’s mental health and marriage and a slightly unconvincing scene in a pub in Exmouth in Devon – but considering the complex ubject it’s a pretty decent movie. For those wishing to study how a financial crisis happens it is essential viewing.
Emergency Covid-19 business loans
Thousands of loans have been granted to businesses across the UK by banks to help them through the current crisis. Starting in March 2020 many of those loans are coming up for repayment and that’s where the problem lies. The Government guarantees 80% of the loans so the banks have anecdotally not been too concerned about doing their usual credit checks on who is taking them out. The Government’s own National Audit Office (NAO) has said that up to 60% of the loans will fail to be paid back landing the tax payer with a £26bn bill. A chunk of those loans were also given to criminals who set up ghost firms purely to take the money and run – in one case in London last year police arrested two men who borrowed £500,000 in multiple loans.
The longer the crisis continues the more likely more firms will crash and default on those loans. This time the banks won’t be taking the hit – instead it’s the Government and that ultimately is us the tax payer. The only way out for the Chancellor of the Exchequer is to increase printing money (quantitative easing), increase borrowing and to raise taxes. Since we are in an economic crisis already with a recession almost certain it’s hard to see if there is room for another crash like 2007-2008. In the 1980s a property bubble burst in 1989 when six years of boom popped, and in the years running up to 2007 the same thing happened. Is there going to be another one now?
In contrast to pre-2007 when the economy was fine and unemployment was low today unemployment is growing due to the Covid-19 crisis. Several observers have predicted a fall in prices as interest rates eventually rise as the protections offered during lockdowns end and unemployment increases this year. If it’s a bubble then it’s popping very slowly and it’s anyone’s guess whether a broker somewhere is betting on a short.
Harry Mottram
For details for the work of the journalist Harry Mottram visit www.harrymottram.co.uk
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Notes
*Short: A broker borrows shares for a fee from a lender, sells them and waits for the price to fall before selling them back at the high price but getting paid the difference between the high and low price as payment – all part of the short deal with the lender who thinks the broker is nuts. It’s high risk as usually share prices rise in which case the broker loses money. Buying shares for a ‘long’ term investment is the opposite to short.
About ICSM Credit
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