22 January 2016

CapX Reviews The Big Short


Successful investors are lucky. With the kind of timing that most PR people can only ever dream of, Paramount Pictures has chosen a week when stock markets around the world have been in freefall for the UK release of The Big Short, which is a film about the last time that stock markets around the world were in freefall. Film-making itself is a form of high risk financial gambling, and to get that kind of result from your bet you need luck in abnormal quantities. The schedulers at Paramount have been so lucky that if you made a film about it, no one would believe your story.

The Big Short is about the great credit crash of 2008, and how some people made a fortune out of what for everyone else was a financial disaster. For those of us who still think in terms of buying things in the hope that the value of those things will go up rather than down, this takes a little explaining. But as any City trader will tell you, the idea that you lose money when prices go down is terribly old-fashioned: the fact is that when prices go down it is actually possible to make more money more quickly than when prices go up. That’s partly because price falls are often a lot steeper and faster than price rises. But it wouldn’t work without that clever trading trick, the short.

This film makes it its business to explain the devilish workings of the short, with the help of some of the most impressive actors in Hollywood including Brad Pitt, Christian Bale, Ryan Gosling and Steve Carell. The makers have chosen a rather circuitous (ie, not short) route for this explanation, with plenty of digressions and rather laboured cameos from a diversified portfolio of celebrities  But first, let me offer the short explanation of the short.

Short selling is a kind of anti-investment. The core idea of capitalism – that the holders of capital loan their surplus wealth to businesses in order to create profits – is reversed. Short sellers profit from the decline of businesses, not from their creation. They don’t add capital to businesses, they subtract it. The potential winnings are huge but so are the risks, especially at the aggressive end of the business. That is where traders sell stocks or securities such as mortgage-backed debt that they don’t actually own (technically the assets are ‘borrowed’), in the expectation that when settlement day comes around the price will have fallen. Whatever you have sold high can then be bought cheap, the difference being your profit. Another way of shorting is to buy options to trade at a certain price and a certain time, in the hope that falling prices will generate a profitable price difference. Either way, it’s high risk. With options you can easily lose all your money (in conventional investment you usually have something left over even if the price goes down). With ‘naked’ shorting it can be worse: it is not impossible to end up owing far more than you invested in the first place, if the market moves against you.

The lesson is don’t short unless you are right. But how do you know you are right?

The Big Short throws us headlong back into the supercharged boom that preceded the bust, the time when the prices of everything only ever seemed to go up, when banks competed to hand out loans on ever easier terms (‘ninja’ loans: no income, no job), and it seemed as if it had gone on forever and would continue for ever. We have a crew of current and former bankers, with Ryan Gosling as the man who sees the future, Brad Pitt as the seen-it-all ex-trader who remembers the past, and Christian Bale as a neurosurgeon-turned-financier, a kind of Rain Man savant who has the key to the secret mathematics of the coming crash. Our heroes are painted as the only people in the world who can see that it is all a bubble, and that bubbles burst. They are also the only people who can see that what is going on is terribly, terribly wrong. “How can you sleep at night knowing you are ripping off working people?” shouts super-banker Steve Carell, which of course is something that super-bankers say never.

Is it any good? The Big Short has already been on release in the United States for a month, and although it has picked up Oscar nominations including for best film, it has certainly proved a polarizer with the critics. They either love its stylishly foul-mouthed momentum and its wicked comedy amid the financial mayhem, or they hate its preachiness and lack of focus (director Adam McKay is best known for witty but mildly disorganized slapstick comedies like Anchorman and Talladega Nights). For me I’m betting both ways on this, I’m going long and short (something which – amazingly enough – some professional investors actually do).

I’m short because just about everything in this highly entertaining film is somewhat inaccurate. It is not true that the so-called ‘long boom’ that give rise to the credit crisis was very long – at the time of the meltdown the dotcom crash had ended only six years earlier. It is not true that that nobody else forecast the 2008 crash – plenty did, especially after the mini-crash of 2006 that gave warning of what was to come. It is not true that the boosters of the bubble thought it could never end – on the contrary, the end was widely expected, it’s just that in a bull market no one wants to get out too soon. Above all it is not true that the people who made money shorting the property market knew exactly what was coming, because in investment no one ever knows exactly what is coming. They were gamblers, like everyone else, and they got lucky. The only big budget film about the financial world that has ever got this right is Scorsese’s The Wolf Of Wall Street, which understood that the real money in banking is made by salesmen, and salesmen neither know nor care whether an asset is going “up, down, sideways or in f***ing circles” as the film so succinctly has it.

On the other hand I am long because The Big Short has some blue-chip Triple-A acting (no one is weak and Christian Bale is particularly good), it has the kind of underdog storyline that is difficult to dislike, it has a script that absolutely crackles,  and there are some extremely well-cut suits. It is not the best finance film ever but despite being about disaster it is fun. You are unlikely to leave feeling your investment was ill-judged.

Richard Walker is a journalist and advisor to financial companies.