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
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
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
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.