Movie Review of "The Big Short"

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Section A
"The Big Short" was a movie that talks about a few financial market traders and the hedge funds managers who predicted the 2008 financial meltdown. These traders made billions of profits when the market crashed. Only a few of them could see the rot in the economic system and the deceit in the housing market and they betted against it. Before the existence of this movie, a book has been published named "The Big Short": inside the Doomsday Machine authorized by Michael Lewis.
The film analyzed the operation of banking in the 1970's. People did not rush into banking jobs to make large sum of money, but then the film showed how things changed for the time leading to the introduction of mortgage-backed securities into the market. The market grew too so massive, as individuals made billions of dollars. The two years before the market meltdown, a trained doctor named Michael Burry turned hedge fund manager discovers inconsistencies in the housing market and decides to short the market. Along the way, James Vennet also finds out that the housing market was a ticking time bomb. He convinces Mark Baum who investigates and confirms it and decides to short the market as well. Two newbies Jamie and Charlie in their quest to Wall Street also discover the bubble.
Ethical Issues
The main ethical issue in the film is greed exhibited by investment bankers. Many would call it being an opportunist, but when Burry decides to short the housing market two years before the crisis, Goldman Sachs executives did not want to understand why Dr. Burry wanted to take that risk. What happened next was bank executives earned huge bonuses and laughed off the sales of they had made. No one mentioned the aftermath of a collapse. Only Mark Baum and Ben Rickert who ironically show remorse for the people who bear the cost of the crash. Ben helps Jamie and Charlie become wealthy, but he is sad that millions of low-income families will lose homes and their livelihoods.
On the other hand, Mark Baum had a heavy heart that if he decides to sell his swaps, his investors would be happy but this action will destroy lives. Something that he did not believe in. Vennet gets a huge bonus in the end, and he is happy despite working for a government agency that was supposed to be knowing about the bubble before it happened. Instead of taking necessary precaution to safeguard the savings of millions of small investors, he decides to look for an investor. This is an indication that perhaps the government through its agencies had been aware of the bubble but refused to believe that it would happen. They thought banks were too big to collapse and it happened, taxpayers will bear the burden, and so the government did nothing. There was no responsibility on the side of the government.
The other ethical issue that is raised by the film is corruption. Rating agencies were apparently trading ratings for fees which is way more dangerous because it misleads the entire market. When Mark Baum and his team confronts standard & poor's offices, the executive there confirms that if they do not give them what they want, they would walk to the next block at Moody's and get what they want. She further says it is not her choice because she is also employed and she had a boss. Baum again talks to a CDO manager who confirms that he traded bonds from investment banks but represented investor. The level of corruption in the market before the meltdown was tantalizing and it was hard to comprehend how people could live their lives after ripping off poor people of their savings.
Behavior Analysis
Burry was a risk taker. Being good with numbers, he saw an opportunity and decided to invest the entire of his portfolio into it. He ignored protests from investors, but he kept saying that he might be early but the housing market would crash. Baum, on the other hand, is an opportunist. Someone hinted to him of the impending bubble, and he did some homework to confirm. He realized that and invested into the market. Although he is portrayed as a remorse person, he does nothing to help the people who were going to lose. Jamie and Charlie are young enthusiastic and adventurous. They have this burning desire to succeed on Wall Street, and the keep trying. They notice something wrong with the housing market, and they seek the help of a senior trader who had been there before. They eventually make some money out of the meltdown, but they are remorseful for the bankers who were seen packing their bags and heading homes. They had created a job for themselves whiles others were heading back.
Section B
The film left me disappointed given the actions of some individual investors who were greedy and never thought about others. Even those who thought about the families that were about to lose their homes and jobs did not feel much better since they went ahead to do what they were not supposed to do in the first place. Research shows that financial crisis damages and ultimately distort social order creating unstable societies (Claessens, Kose, Laeven, & Valencia, 2014). After 2008 crisis, I cannot trust entirely trust investment bankers. I have a feeling of hatred for traders who prey on people’s life savings without due care. In the end, it is the taxpayer's funds meant for development projects that were used to bail out already sinking investment banks that were thought to be too big to fail.
The film is educative to investors, regulators, and intermediaries. The lessons from the events leading to the financial crisis are vital in preventing future financial catastrophes. I feel regulating agencies slept on their job even when red flags were being raised by individuals like Michael Burry and James Vennet. The film had a negative impact on me especially when I saw rating agencies trading good ratings for fees. The United States is a world leader, and others in the world look at us a model economy for them. After the financial turmoil, it was evident that we had disappointed the entire world.
The main characters behaved rationally as any capitalist trader would behave. I see a lot of pretense and selfishness among the characters. Baum hates his job, and he understands the consequences of the market crash. This should have been reason enough to warn the public and regulators of the impending bubble that was about to bust. But he chooses to buy swaps instead for the sole reason of making more money. Jamie and Charlie are perhaps too innocent. They are young and want to make it the stock market. It is commendable of them to try to go to the media to highlight what was happening. But I see the hypocrisy in them since they expect bond prices to shrink given the default rates were rising. They only tried to go to the media to for personal reasons. I see Rickert as a person with double standards. He knew that people would lose homes but went ahead to help Jamie and Charlie short the market for them for them to make billions.
Section C
Is Shorting Unethical?
The fact that short sellers make abnormal profits from the short positions when all goes well makes it unethical. It is fair that out of a business venture the society befits too and this does not always happen. It is even worse when thousands of low-income earners lose their life savings because someone undertook too much risk with their monies and lost the bet. Short selling makes the rich richer while condemning others to stressful lives and poverty.
Short sellers work too hard to study numbers and do intensive research before making a decision. I believe short selling is ethical in the sense that it reveals flaws in price valuations of companies. Short selling might even deter fraudulent activities in the financial market. The SEC imposed a ban on short selling in the US financial markets between 2008 and 2011 saying that it contributed to declining prices of securities of financial institutions unrelated to their actual price valuation (Beber & Pagano, 2013). Many other countries adopted the same move by banning short selling but in the end lifting the prohibition because the benefits outweighed the perceived demerits of short selling.
Short selling slows down price discovery more so where negative information is concerned (Beber & Pagano, 2013). From the findings, I would say that short selling is ethical and proper regulatory framework need to be developed to guide this activity in the market otherwise any efforts to suppress it may slow down the market.
Role of Rating Agencies
The confidence of investor is based on what rating agencies do. Their output gives investors a reason to invest in a particular security. Rating agencies are a public eye. They are supposed to read thousands of pages and numbers on behalf of investors and rate securities and eliminate fraud. First of all, having to compete to give the public security rating might be the root of all that happened. The United States is a capitalist nation. Individuals as well as firm did whatever it takes to remain in business. Some of the means companies used to stay in business show that they lacked morality. It beats logic to rate a security AAA while the underlying assets were being defaulted. Rating agencies are expected to be of high social standing and advocate for the illiterate in the society. After the film, it is clear that they lack the moral authority to be trusted by any investor.
Rating agencies contributed to the crisis by misleading investors on the ratings of derivatives that investment banks were submitting to them. They gave AAA rating to mortgage bonds whose underlying assets were being defaulted. They did this on the premise that they had no option and for them not to lose business to competitors they had to give the ratings as banks wanted. This action was very wrong and unethical business practice. A few people who looked beyond the bonds saw worthless underlying asses inform of subprime loans that were not good. The nonperforming mortgage loans bundled together to form these derivatives meant that increasing delinquencies would render the bonds worthless. All rating agencies hid behind the fact that their ratings were a mere "opinion" and they were not liable for any wrongdoing.
About Baum Sentiments
I think Mark Baum was right. The housing market was a time bomb ticking considering extensive investigation that he did. Without proper jobs and consistent income; a characteristic of immigrants and poor people; delinquencies and defaults were eminent. From the film, it is widely said that default rates up to 8% would crash the market. Poor people and unemployed immigrants are likely to default on their loans for obvious reasons. Mortgage loans were given to them without income verification or any form of a back check. These bad loans were then bundled together to create mortgage bonds which were rated triple A. So growing number of immigrants meant that they needed homes and to get homes they needed loans which they got from banks. And since banks saw the risk of default, they started grouping the loans to as risky assets and started trading them in the market. Unsuspecting investors invested in the securities. In the end, everyone would blame them for failing to honor their obligation to repay their loans.
Beber, A., & Pagano, M. (2013). Short-selling bans around the world: Evidence from the 2007–2009 crisis. The Journal of Finance, 68(1), 343–381.
Claessens, S., Kose, M. M. A., Laeven, M. L., & Valencia, F. (2014). Financial crises: Causes, consequences, and policy responses. International Monetary Fund.

December 15, 2021




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Movie Review The Big Short

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