Saturday, February 11, 2017

Movie Review: 'The Big Short' (Paramount, 2015)

The Big Short
Directed by Adam McKay
Paramount Pictures, 2015

Review by Stuart Rosenblatt

The release of The Big Short could not have been timed better. It is a powerful intervention into both the Presidential campaign and the onrushing new financial crisis. Adam McKay's "The Big Short" provides a terrific window into the deliberately opaque world of financial skullduggery that caused the financial crash of 2008 and is in the process of disintegrating again. The movie is well done, humorous and poignant at the same time. It features an "A List" of Hollywood actors, including Brad Pitt, Steve Carrel, Christian Bale, Ryan Gosling and Marisa Tomei, who, to their credit, immersed themselves into the world of Wall Street trading to create a potent rendition of Michael Lewis' best- selling book. However the movie, like the book, present a narrow, not totally accurate picture of the Wall Street monster. 

The repeal of the 1933 Glass Steagall Act in 1999 opened the door to the massive financial speculation which formed the plot of the movie and lie at the root of the mortgage-detonated meltdown of 2007-08. The Glass Steagall Act, which separated commercial from investment banks had worked for 66 years to prevent the kind of collapse that is developed in the movie. The Wall Street banking giants, from Citigroup to Goldman Sachs, engineered the takedown of Glass Steagall and the creation of the bubbles that followed. This is not developed in Lewis' book or Adam McKay's movie, though McKay does end with a passing call to "break up the big banks." Unless Glass Steagall is reinstated post-haste, and a Roosevelt-Lincoln style industrial recovery is launched, the likelihood of the United States surviving the new, onrushing collapse is very small. 



The Long---The Big Short's Big Contributions 

The Big Short does pull back the curtain on the ugly frauds created by Wall Street over the past several decades, that were given deliberately obscure names to lure foolish citizens into their deadly traps.

McKay interspersed cameos of Hollywood actresses Margot Robbie, Selena Gomez and celebrity chef Anthony Bourdain to interject hilarious images into the plot to quickly teach the audience the "fine points" of Mortgage Backed Securities (MBS), Credit Default Swaps (CDS), Synthetic Collateral Debt Obligations (CDOs and SCDOs), and other Wall Street witches' brews. Using simple building blocks, Ryan Gosling's character constructs the precarious structures of CDOs, and then proceeds to crumble them by simply pulling out a few pieces. By the way, this is precisely what happened. Gomez and her cohorts seduce the viewer with an uproarious scene at a gambling table to demonstrate the allure of Wall Street side bets.

The movie demonstrates how the "system" lured idiotic Average Joes into taking out mortgages they could ill afford, and large numbers of them per person (!) Pole dancers were signing for half a dozen mortgages a piece, without the slightest ability to make the payments; all so the banks could "securitize" them into mortgage securities and other instruments. Shyster bond salesmen sold securities that were completely fraudulent, without blinking an eyelash.

Perfectly capturing the corruption of rating agency officials, from Standard and Poor's or Moody's, Melissa Leo's character sells "ratings" to the highest bidding bank in order to keep their business.

Just when you started to identify with the bond salesmen "shorting the system", McKay has Brad Pitt or Steve Carrel confront you with the moral and real consequences of betting to bring down the economy. In stark terms, they describe the massive job loss, pain and suffering that was about to be rained down on the nation.

There are no "good" people in the movie, or the book. This motley group of financiers who figured out that the mortgage bubble and its derivatives were about to disintegrate were hardly sympathetic people. The movie accurately captures their determination to reap the rewards of their insights, no matter at what expense. As in any great Shakespeare tragedy, there are no heroes in this movie, only very smart, flawed, outsiders seeking to "beat the system".

The Short of the Movie 

Where the movie and the book fall woefully "short" is they present the financial machinations from "inside" the structure. Unless you begin "from the top" you get hopelessly entangled in the web of deception. The real issue is the entire transatlantic financial system, the very British and Wall Street cartels that have dominated the western economic world for the better part of three centuries. Their control has only been interrupted by the American Revolution, the Lincoln and Franklin Roosevelt presidencies, and briefly the United States under John F Kennedy. In the US, the Too Big To Fail Banks, viz. JP Morgan Chase, Citigroup, Goldman Sachs, Morgan Stanley, Wells Fargo, and Bank of America, and their hedge funds, private equity funds and other flunkies run the show.

Over the past twenty years, their most egregious action has been the takedown of the 1933 Glass Steagall Act, which separated commercial banking from investment banking, insurance, hedge funds, and other more exotic operations. The takedown began with the ascension of Morgan banker Alan Greenspan to the chair of the Federal Reserve System in 1987, and ended with the passage of the Gramm-Leach-Bliley Act of 1999 (the repeal of Glass Steagall). Six months later the same banks rammed through the passage of the Commodity Futures Modernization Act in 2000, deregulating over the counter derivatives trading. The final action was the voiding of sections of the Bank Holding Company Act of 1956, as part of Gramm-Leach-Bliley, which had prohibited insurance companies from being housed with investment banks in the same holding company. 

The crash of Long Term Capital Management hedge fund in 1998, a result of wild derivatives speculation, funded by loans from 55 federally insured commercial banks (!), nearly brought down the whole system. Greenspan's response was to "throw a wall of money in" to save the system. When the Dot Com bubble burst in 2000, Greenspan lowered interest rates dramatically to create the real estate bubble, and the accompanying derivatives bubble. Under the banner of "deregulation", this gang of thieves erected the "securitization" edifice, which by 2007, had grown to hundreds of trillions of dollars in derivatives, held mostly on the books of the federally insured banks.

It is this apparatus that is the real subject of the horrible events of 2005-2008, the time period of the movie. The first Collateral Debt Obligations were created by Michael Milken at Drexel Burnham Lambert in the 1980s, before he got hustled off to jail, back when his type were actually put away. The first Credit Default Swap was initiated by JP Morgan banker Blythe Masters in the 1990's, and the Synthetic Collateral Debt Obligation was hatched at Goldman Sachs in the middle of the 2000’s, to further "diversify risk", i.e. amplify the gambling. 

The creation of the financial bubble of 2000-2008 was orchestrated top down by Wall Street banks. According to derivatives expert Janet Tavakoli, "banks supplied corrupt mortgage lenders with credit lines and packaged the loans into private label residential mortgage backed securities (RMBS). Top mortgage lenders from 2005-07 included Long Beach, now part of JP Morgan Chase, with $65 billion in loan volume, Wells Fargo Financial, with $52billion; JP Morgan Chase's Chase Home Finance with $30 billion; Citigroup's CitiFinancial with $25 billion, and Wachovia, now part of Wells Fargo, with $17 billion. 

Countrywide, now a part of Bank of America, was the largest subprime lender with $97 billion in loan volume. JP Morgan, Bank of America, and Citibank supplied the lines of credit that made the damage possible. Ameriquest Mortgage was the second largest subprime lender ($80 billion) with JP Morgan, Citibank and Bank of America supplying their money train. ( P. 29 Decisions, Life and Death on Wall St. ) Citibank had lines of credit into Bear Stearns, and JP Morgan Chase had large lines of credit into Lehman Brothers. Lehman had lines of credit of nearly $190 billion from all the major domestic and international banks to generate subprime mortgages and MBS. All of this activity would have been prohibited under Glass Steagall. 

Furthermore, had Glass Steagall not been repealed, the crises at Lehman, Merrill Lynch, Bear Stearns, and other so-called "pure investment banks" would never have occurred. All three entities had federallyinsured commercial banks in their holding companies going into the crash of 2007. (See Pam Martens, Wall Street On Parade for numerous articles on this including the recent "Larry Summers Lectures Bernie Sanders on Financial and Monetary Policy”. Had Glass Steagall been enforced these companies would have been prohibited from engaging in the massive derivatives creation and trading that led to the 2007 crash.

Also, had the sections of the 1956 Bank Holding Company Act not been repudiated in Gramm-LeachBliley, the meltdown at AIG, which was at the center of the derivatives machine, would likewise never have occurred. According to Martens, "AIG owned, at the time of the crisis in 2008, the FDIC insured AIG Federal Savings Bank. AIG also owned 71 U.S. based insurance entities and 176 other financial services companies throughout the world, including AIG Financial Products (AIG FP), which blew up the whole company by selling credit default derivatives." (Wall Street On Parade, 12/30/15) 

The Real Architects of "The Big Short"----Goldman Sachs and Company

Both the movie and Lewis' book amplify the role of Michael Burry (Christian Bale), Greg Lippmann (Ryan Gosling), Steve Eisman (Steve Carell), and their cohorts in "discovering" the flaw in the mortgagesecurities bubble and "shorting" the bubble. This is not true. All three were early entrants into the operation, and did smoke out the problem, but they were merely "plugged into" a mechanism that had its roots in the Wall Street banking syndicate. 

The key question asked by Eisman and Burry was "who in their right mind" is on the other side of the short? Who is betting the so-called house that the bubble will endlessly expand and be able to cover all the derivative bets? Lewis figured out, after the fact, that it was none other than American International Group, AIG, the behemoth insurance company. This was never really emphasized or developed in the movie, leaving many viewers in the dark. 

Eisman, Burry, Lippmann, et al were not the only geniuses who figured things out. As documented by many investigators including NY Times columnist Gretchen Morgenson, Janet Tavakoli, the Senate Permanent Subcommittee on Investigations, and the congressionally-created Financial Crisis Inquiry Commission (FCIC), key Wall Street players including Goldman Sachs, Deutsche Bank, Morgan Stanley, and their pawn AIG, were among the key initiators of "the short" bet against the housing market.

Under Goldman Sachs CEO Henry Paulson, later Treasury Secretary, Goldman Sachs "from 2004-2006 provided billions of dollars in loans to mortgage lenders; most went to the subprime lenders Ameriquest, Long Beach, Fremont, New Century, and Countrywide through warehouse lines of credit, often in the form of repos....From 2004-2006 Goldman issued 318 mortgage securitizations totaling $184 billion (about a quarter were subprime) , and 63 Collateral Debt Obligations (CDOs---packages of mortgage securities) totaling $32 billion. Goldman also issued 22 synthetic CDOs or hybrid CDOs with a face value of $35 billion between 2004 and 2006." (Financial Crisis Inquiry Commission Report, p. 142)." 

As explained in the movie, synthetic CDOs were paper transactions containing Credit Default Swaps (CDS), not actual mortgages or mortgage securities. Hence they merely "referenced" various credit instruments, and were bets on whether the underlying mortgages were solvent or not. The long position bet that the bonds would continue to pay, and the short position bet that the bonds would ultimately default, resulting in a massive payday for the short speculator. The bettor paid a regular small premium to the holder of the long position, but the long position paid a massive amount if the bond defaulted or radically decreased in value. Synthetic CDOs referenced the same CDS and MBS many times. For example, Goldman Sachs used one $38 million subprime mortgage bond as a reference bond in more than 30 synthetic CDOs! ( Tavakoli, p. 48). The purpose of doing this was to create as many bets as possible, and if the short succeeded, it magnified the payout many times!

Goldman and others saw the debacle approaching at the same time as Burry, Eisman, Lippmann et al. Beginning in 2004, Goldman launched a series of synthetic CDOs named Abacus, and ultimately created 25 Abacus deals by 2008. These bonds contained almost worthless MBS based on rotten subprime mortgages, which Goldman deliberately put in the bonds. At the same time, Goldman took the short side of the trade. That is, they knew the bonds would collapse and sold them to their best customers as Triple A rated, while shorting them simultaneously for the firm. Thus the big, Big Short. 

According to the FCIC, between 2004 and 2007, Goldman packaged and sold 47 synthetic CDOs with an aggregate face value of $66 billion. It underwrote the deals and charged up to 1.5% on each package. (p. 145 FCIC report) It took the short side of the trade and made out like the bandit it was. Who were the losers? According to Gretchen Morgenson, " Pension funds and insurance companies lost billions of dollars on securities that they believed were solid investments, according to former Goldman employees with direct knowledge of the deals.... "

The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen," said Sylvain Raynes, an expert in structured finance at R and R Consulting in New York. "When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else's house and then committing arson." (Morgenson, NYT, Dec 23, 2009)

The piggy bank in this operation was AIG. In 2004, AIG was the largest insurance company in the world, according to the FCIC report (p. 139). It had $850 billion in assets; 116,000 employees worldwide; and 223 subsidiaries. It also had the highest credit rating, AAA. It could borrow cheaply and deploy the money to any lucrative investment it found. With the repeal of Glass Steagall in 1999, and the repeal of the provision of the Bank Holding Company Act prohibiting insurance companies from participating in dodgy securities operations, AIG became the counterparty and financier of the entire scheme. 

Goldman Sachs led the charge, but many Wall Street firms went to AIG to fund their derivatives operations. Connecticut-based AIG Financial Products became the headquarters of the operation. This unit issued credit default swaps guaranteeing debt obligations of major financial institutions in both Europe and the United States. At its height AIG had a portfolio of $2.7 trillion in over the counter derivatives. 

AIG FP was founded in 1987 by former members of Michael Milken's bond department at Drexel Burnham. Milken, one of the perpetrators of the 1987 market crash, was the creator of high yield junk bonds, those assets in the throes of failure today. He went to jail for securities fraud in 1990. In the book, Lewis does a terrific profile of Joe Cassano, the boss of AIG FP, who approved all AIG CDS, no questions asked. Cassano's job was to insure the bad paper, rake in the money for AIG, and provide protection for the most outrageous trades. Unfortunately, this picture did not make it into the movie.

According to the FCIC, "AIG's biggest customer in this business was always Goldman Sachs, consistently a leading CDO underwriter. AIG also wrote billions of dollars of protection for Merrill Lynch, Societe Generale, and other firms.....In 2004-2005, AIG sold protection on super-senior tranches of CDOs valued at $54 billion, up from $2 billion in 2003. In an interview with the FCIC, one AIG executive described AIG FP principal swap salesman, Alan Frost, as "the golden goose for the entire Street." (FCIC p. 140) 

As the FCIC reported, AIG wrote CDS "insuring" all sorts of assets including MBS and CDOs. Its business in these areas grew from $20 billion in 2002 to $533 in 2007. This was all done by AIG FP, who posted no collateral when they wrote the contracts!! This led to the $180 billion taxpayer bailout of AIG in 2008 when these gambling bets went sour. Goldman and their cronies generated the instruments, shorted the trade, and had AIG take the "long" side of the bet, again, no questions asked.

That is how Burry, Hockett (Brad Pitt), Eisman and others orchestrated their operations. AIG was the counterparty in virtually all the CDO bets. 

Goldman Sachs was not the only player. Deutsche Bank, getting wind of Goldman's short, jumped in full force. And who was the key trader USED by DB to make the short trade? Greg Lippmann. As Lewis delineates this in the book, Lippmann (Ryan Gosling), a bond dealer at Deutsche, was ordered by Deutsche Bank to buy credit default swaps from Deutsche's CDO department!! So the portrayal of Lippmann in the movie is hardly accurate. Lippmann was bright and a tough trader, but he was deployed by DB to mirror the Goldman Sachs' short gambit. 

Deutsche's role was prominent. Not only did they place large negative bets themselves, by at least 2005), but they rigged the system by creating something called "Pay as You Go" to speed up the payments to DB and others on defaulting CDOs. Morgan Stanley also bet heavily against CDOs. They invented a feature described by Morgenson: short sellers could lock in very cheap bets on mortgages beyond the life of the bonds.....they could get payouts long after the bonds had defaulted! 

Glass Steagall, Redux

All of this would have been illegal had Glass Steagall not been repealed and the Commodity Futures Modernization Act not been passed. The result was the worst crisis since 1929. For their part in the big short, the perpetrators should have gone to prison, specifically Lloyd Blankfein of Goldman, Cassano and co. of AIG, Dr Josef Ackerman of Deutsche Bank, and others. This was fraud, pure and simple. 

As the Sen. Carl Levin hearings demanded in 2011, Goldman Sachs should have faced criminal charges for "misleading the public, misleading their clients, lying to Congress", etc. Blankfein should have faced criminal charges personally. 

Of course none of this was done. We are now in the midst of a similar but far worse crisis than that of 2007. The same massive derivatives bubbles persist, the same kind of nefarious gambling with depositors' money is going on, this time in commodity speculation, junk bond investing, collateralized loan obligations and other financial fraud. To its credit, the conclusion of the Big Short movie correctly warns of just such an onrushing meltdown and calls for "breaking up the big banks."


Stuart Rosenblatt has written extensively on economic and strategic affairs, for among other publications, Executive Intelligence Review.  He also is the editor of a weekly economic report to congress and elected and other officials---Legislator Alert.  He has been actively involved in promoting legislation in Congress to restore the Glass-Steagall Act and succeeded in abetting the drive that resulted in the declassification of the final chapter of Congress' report on 9/11.  Mr Rosenblatt has also written and passed hundreds of resolutions to Congress from state legislatures and city councils on economic matters.  He resides in northern Virginia with his wife and regularly visits Congress to lobby on economic policy. 


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