A breakdown of the US housing market crash as depicted in ‘The Big Short’- a comedic feel-good film about the end of the world

By Neem Pillai

The Big Short is a film starring Christian Bale, Ryan Gosling and Steve Carell, that takes place between 2005–2008 depicting the lead up to the greatest financial crisis since the Great Depression. It tells the story of three groups of stock traders who foresaw the collapse of the economy and bet on it, eventually earning billions of dollars combined while the rest of the nation was sent into ruin. Basically, your typical Wall Street movie.

For a little context, the Global Financial Crisis occurred between mid 2007 to early 2009. It was caused by multiple factors, the first being the bursting of the US housing market bubble created by an overwhelming load of mortgage-backed securities that bundled together thousands of sub-prime loans. The banks lent money recklessly leading to an unprecedented number of people defaulting on their loans. The combined losses led many financial institutions to ruin, requiring a government bailout.

Now if you found all that a bit confusing that’s the point. As Christian Bale’s character, Michael Burry puts it, “Wall Street loves to use jargon to make you think that only they can do what they do, or even better for you to just leave them the fuck alone.” But fear not, because a short cameo by Margot Robbie in a bubble bath clears everything up. She explains that large banks were making huge amounts of profit, billions, on the 2% they received for selling these bonds. When banks lend money on a mortgage, they often sell off this loan to other institutions to reduce the amount of money owed to them. These institutions then put several loans together into a bundle called a mortgage backed security on which shares can be sold. These shares entitle holders to dividends in the form of their share in the monthly mortgage repayments from the loans in that bundle. Typically, the loans making up these mortgage backed securities were the mostly highly rated loans- rated AAA (lowest chance of default), and originally, they were great, nothing could possibly go wrong with thousands of AAA mortgages bundled together guaranteed by the US government. However, as banks continued to make increasing profits, they began to include lower ranked loans.

Well, if they are so safe, you might question how this caused the housing crisis which in turn created an economic- nationwide disaster? Ryan Gosling answers that question for us. Banks started to add lower rated BB and B mortgages to the bundle. Alright, that’s fine, the B and BB rated mortgages could allow you to earn a little extra money for the additional default risk you take on.

But the problem only arises later when the banks started to run out of mortgages to put in the bonds otherwise known as mortgage backed security because there are only so many houses and so many people with good enough jobs to buy them. However, these securities were seen to be super popular, and to keep the ball rolling, banks began to fill them with riskier mortgages (sub-prime mortgages) to keep the money flowing into their pockets and Robbie emphasises “whenever you hear sub-prime think shit”.

B, BB and even BBB rated mortgages became extremely risky because loans were handed out left and right with no income verification and adjustable rates. This basically meant that people with no jobs and even people who filled out applications using their dog’s name were approved for a loan. This was especially detrimental because interest rates which started low eventually increased to the point where these people were forced to default. These B, BB and BBB mortgages that were too risky to sell were combined, into a CDO (collateralized debt obligation). basically a CDO is a bundle of shares in multiple mortgage backed securities and hence the risk was considered to be diversified away and was given a 92% AAA rating.

So, when Burry identifies that these mortgage bonds which were supposedly AAA rated CDO’s were basically full of “shit” he decides to short the bonds meaning bet against them. Eventually when the housing bubble burst, the mortgage bonds and CDO’s failed as predicted and thousands of people defaulted on their mortgages. 6 million people lost their homes, 5 trillion dollars in pension money, real estate value, savings and bonds was lost and that was only in the US. Spoiler alert, Burry won the bet.

Naturally this resulted in a huge loss of faith in financial institutions. Now, regulation of financial markets is very strict. In fact, there are whole regulatory bodies dedicated to the monitoring of financial markets to prevent misconduct driven by greed, to protect the integrity of the market, and to protect the general economy as a whole.

So if an apocalyptic-comedy-tragedy film appeals to you The Big Short might be just the light Sunday afternoon entertainment you are looking for, and if that isn’t incentive enough maybe a cast consisting of Ryan Gosling, Brad Pitt, Steve Carell, Selena Gomez and Margot Robbie might convince you.