The Big Short Finds Joy

 | 

In 2008 the United States experienced the biggest collapse in the real estate market since the Great Depression of the 1930s. While many had been talking about the expanding bubble, no one really thought it would burst. Real estate was the one sure deal, the tangible investment that everyone needed and thus would never disappear. During the upward panic to get into the market before prices skyrocketed even further, buyers were snapping up houses within a matter of days after they were listed, often engaging in bidding wars that drove the sales price higher than the asking price. “What our houses are worth now” was the gleeful topic of every cocktail party in every neighborhood, whether you were interested in selling or not. Using easy credit made easier by the “no-doc” loans that guaranteed virtually everyone a mortgage, people who had no business buying houses got into the market, and people who already owned homes risked their solvency by taking out additional home-equity loans to use for other purposes. After all, real estate was too big to fail. Prices always go up.

Until they go down. In September 2008 the bubble burst, leaving overleveraged homeowners in precarious positions — unable to sell, unable to pay, unable to forestall foreclosure, and underwater with their mortgage-to-equity figures. The Big Short attempts to explain what happened, in a film that is sassy, quirky, glib, and sometimes even right.

After all, real estate was too big to fail. Prices always go up.

In the interest of telling a good tale, the filmmakers simplify it, presenting a small portion of the story as if it were the whole story. For example, they virtually ignore the Community Reinvestment Act, which was designed to make mortgage and investment money available in “underserved” (read: poverty stricken) areas. The Act was a noble goal, but it meant that people would be granted mortgages who really couldn’t afford them, and had no cushion whatsoever to deal with repairs, upkeep, or changes in employment (read: getting fired). These were called “subprime” loans officially, but “Ninja loans” derisively (No Income, No Job, Accept Anything). It also meant that the demand for homes increased dramatically, driving prices and new construction upward in response to this new bloc of buyers. By ignoring this Act, the filmmakers suggest that all of the blame lay in the private sector of investment funds and rating services.

Instead, this film focuses on the creation of mortgage-backed securities, which is an investment vehicle that spreads the risk of foreclosure by bundling many mortgages into a single security and then selling shares of that security to a number of investors. Everyone shares in the risk and the reward. And because of that, local bankers no longer keep the mortgages they grant to individuals in the community; as soon as the signatures are dry, the mortgages are bundled away onto the secondary market. In the interest of brevity and creating a single straw man, the film blames this on the mastermind behind the mortgage-backed security, Lewis Ranieri (Rudy Eisenzopf), but this is an oversimplification of what went wrong. Many factors were involved, including Federal Reserve policy on the national level and overproduction of building permits on the local level.

Let’s face it: life is not a screenplay. But that’s how this caper is presented. A few savvy investors notice the increase in late mortgage payments and foreclosures beginning around 2004, anticipate the collapse, and figure out a way to profit from it. All these characters are based on real people. One is Jared Vennett (Ryan Gosling), who breaks the fourth wall to narrate the film in a cool, hipster tone that draws us into the web. Others include the Silicon Valley-based eccentric Michael Burry (Christian Bale), the moralistic Mark Baum (Steve Carell), and two young founders of a trading fund called Brownfield Capital, Charlie Geller (John Magaro) and Jamie Shipley (Finn Wittrock), who bring the also eccentric investment trader Ben Rickert (Brad Pitt) out of retirement and into their deal. Working independently from one another, these traders are convinced they can make a killing by shorting the real estate market (hence the title, The Big Short).

In order for our heroes to succeed in making their millions on short sales, the entire market had to collapse, with millions of Americans bearing the loss.

W.C. Fields made famous the idea that “you can’t cheat an honest man,” and the investment bankers at Goldman Sachs, J.P. Morgan, Bear Sterns, and Lehman Brothers personify that adage. They laugh conspiratorially behind the backs of these short sellers even as they take their money, so confident are they that real estate is “too big to fail.” Of course, we know that the last laugh will be on them. But the bankers will not go down without a fight. The film demonstrates the dubious shenanigans and downright manipulation they used to try to keep the market afloat and force the investors to close their short positions before they could exercise them.

If all this sounds a tad confusing, not to worry! The filmmakers explain such concepts as short selling, CDOs (Collateralized Debt Obligations), ISDAs (International Swaps and Derivatives), and other potentially dry, technical terminology, using the unlikeliest characters. A glamour girl lounges in a bubble bath, sipping champagne and explaining mortgage-backed securities, while the soap bubbles and the fizz bubbles provide a sleazy metaphor for the market bubble that is brewing. A chef chops up unsellable three-day-old fish to make a marketable stew as he explains the fishy rating system that kept these mortgage-backed securities at AAA status even when their defaults were ballooning. A stripper undulates on her pole as she explains yet another investment concept. Music videos appear unexpectedly to demonstrate the euphoria of various characters. These unexpected moments, coupled with a soundtrack reminiscent at times of an Ocean’s Eleven sting, keeps the film hopping and lively.

But this is not a fun topic, and the short-selling sting was not directed against a Las Vegas gangster who deserved his comeuppance. In order for our heroes to succeed in making their millions on short sales, the entire market had to collapse, with millions of Americans bearing the loss. And their brilliant scheme would deliver a double wallop to the already precarious investment banks. According to the film, six million lost their homes, and eight million lost their jobs. Rickert puts it into perspective when he reminds Charlie and Jamie, “If we make money, it’s because ordinary people lose homes, jobs, and lives.” Banks held the prices of their securities up as along as they could, hoping for a turnaround, but in the process they simply made things worse. Regulators were in bed with the companies they regulated, creating a false sense of protection that contributed even more to the disaster. The result was almost as devastating to employees of the major investment firms as the day the World Trade Center was attacked. In its scale, the personal devastation was worse.

The Big Short is not the whole story. It might not even be the true story. But it is an important portion of the story, told with an outstanding cast in an entertaining and engaging way. Surprisingly, it does not trash big business, even though it shows collusion, fraud and manipulation at many levels. Mostly it shows individuals putting their own needs first, protecting their own jobs and security and using their influence to manipulate the bond ratings and the markets to their advantage. No one is overtly evil in this film. It tells a very personal story, one that each of us might be drawn into on a smaller scale if we aren’t careful.

Joy, another film about business, opened the same week as The Big Short, focusing not on the big dealers but on the underserved. Both have been nominated for Golden Globe Awards and both are populated by an ensemble of AAA actors, including Melissa Rivers, who in Joy does a sharp but poignant turn as her mother, Joan Rivers, in her role as a QVC spokesperson. Both films rely on nonlinear storytelling, flashbacks, and dream sequences to make some of their points. This is especially effective in Joy, where disconnected, disorienting scenes demonstrate how seemingly disconnected ideas come together in the imagination to form something new and valuable.

Joy (Jennifer Lawrence) is a creative, bright, hardworking young mother of two and valedictorian of her high school class who has been held back from success by the emotional and physical demands of her eccentric family, most of whom live in her house. Her agoraphobic mother (Virginia Madsen) spends most of her days in bed, watching soap operas; Joy’s ex-husband Tony (Edgar Ramirez), a wannabe singer, lives in her basement and can’t keep a job; her philandering father Rudy (Robert De Niro) also lives in her basement when he’s between girlfriends; and her grandmother Mimi (Diane Ladd), who narrates the story, is the only person who believes in her.

Joy didn’t set out to make my life better, or anyone’s life better except her own. She needed to pay her mortgage, fix her plumbing, and put food on the table.

As a child Joy had big dreams of becoming an inventor, but her parents’ divorce drove her ambitions inside, much as a cicada (a recurring metaphor in the film) spends 17 years in unproductive safety underground. When she cuts her hands badly while sopping up the mess made by a broken wine glass, she figures out how to make a “wringless mop” and decides it’s time to reemerge into the light and dangers above ground to sell her invention to others.

I own this mop. I love it. It keeps my hands clean and dry while it makes my floor clean and sparkly. I also own the Huggable Hangers that the real Joy Mangano invented. They keep my silky shirts and dresses from falling onto the floor in my closet. I’m grateful that she had the spunk and tenacity to overcome all the obstacles she encountered on her way to success, and I’m glad her hundreds of household inventions have made her filthy rich, because her inventions make my life better. But she didn’t set out to make my life better, or anyone’s life better except her own. She needed to pay her mortgage, fix her plumbing, and put food on the table. And like so many other entrepreneurs, she did that by making other people’s lives better too. This is what I love most about this film.

To do it, she needed capital. She needed to conduct a patent search, apply for a patent, design molds to produce her mop, negotiate with manufacturers to make the mop, and market the mop to mass audiences. Capital is the lifeblood of entrepreneurship. Joy finally convinces her father’s latest girlfriend Trudy (Isabella Rossellini) to invest in manufacturing and marketing her invention. The rest of the film demonstrates both the elation and the devastation of entrepreneurship. Through it all, Joy never gives up — not on her invention, not on her family, and not on herself. Harry Browne fans will appreciate Joy’s advice to her young daughter: "Don't ever think that the world owes you anything, because it doesn't. The world doesn't owe you a thing.”

Eventually Joy creates a successful manufacturing and marketing empire that provides startup capital for other small entrepreneurs with an idea and a dream. Joy is a triumphant film about the power of persistence and innovation, desperation and conviction, and the possibility that a simple mop can change the world.


Editor's Note: Reviews of "The Big Short" directed by Adam McKay. Plan B, 2015, 130 minutes; and "Joy," directed by David O. Russell. Annapurna, 2015, 123 minutes.



Share This


Well, Freddie My Fannie!

 | 

A recent piece in the Wall Street Journal, buried by the brouhaha surrounding the election and the Libya cover-up, indicates that the Federal Housing Administration (FHA) is in profound financial trouble. Indeed, it seems to be following its siblings Freddie Mac and Fannie Mae into the swamps.

The FHA has been around for nearly 80 years, and gives taxpayer backing to loans for homebuyers who put as little as 3.5% down. But more recently, the FHA has been used to reinflate the housing market by allowing lots of mortgages to be written. It now guarantees a staggering $1.1 trillion in loans.

The FHA is supposed to use its reserves to cover losses of the loans that go bad. As late as last year, it was estimated that after covering losses, the FHA would have $2.6 billion left in reserves. But, especially because of dicey loans issued between 2007 and 2009, the FHA is projected to lose $46.7 billion this year. That exceeds the $30.4 billion in reserves. The $16.3 billion deficit will almost certainly have to be covered by tax dollars from the budget. This is on top of the $137 billion already ripped off from taxpayers to cover the rescue of those Twin Towers of Corruption, Freddie Mac and Fannie Mae.

In fact, independent housing economist Thomas Lawlar states bluntly that “if [the FHA] were a private company, it would be declared insolvent and probably put under receivership like Fannie and Freddie.”

There is no doubt even more of this to come. The federal housing agencies (FHA, Freddie, Fannie, and lesser ones such as the VA) now back 90% of all new home loans, and the Fed continues to pump out the money ceaselessly. God help us if there is another major “correction” in the housing market.

In a better world, we would amend the Constitution to require that after ten more years (say), the federal government will have ended all housing subsidy programs and be permanently banned from any involvement in the housing market from that point on.

But this is far from a better world.




Share This


Kelo: The Unintended Consequences

 | 

I chuckle whenever I hear Rush Limbaugh warn that the reasoning behind the Supreme Court’s Obamacare decision (National Federation of Independent Business v. Sebelius)can now lead to legislatures mandating the eating of broccoli. No more. The July 21 issue of the Economist reports how one California jurisdiction is taking the Kelo v. City of New London decision where few imagined it would go. And it is well to remember that where California innovates, the rest of America often follows.

In Kelo, the Supreme Court held that eminent domain could be used to transfer land from one private owner to another as a permissible "public use” to further economic development for the general benefits of a community under the “takings” clause of the 5th Amendment of the Constitution. It was a 5-4 decision, with Justice Kennedy providing the swing vote.

Traditionally, the power of eminent domain had been interpreted to justify the taking of private property only for direct government use — for roads, railways, government buildings, and such. But this concept had been undermined over the years, first by Berman v. Parker (1954), which allowed the taking of private property to combat “blight” (in the broadest sense), then by Hawaii Housing Authority v. Midkiff (1984), which allowed takings to break up oligarchies. Both concepts were vague, and subject to pure demagoguery. Subsequently, scores of in flagrante takings were never properly contested — until Kelo.

The majority opinion’s reasoning was based on the concepts of “minimum scrutiny,” the idea that government policy need bear only a rational relationship to a legitimate government purpose; and “judicial restraint,” the idea that judges should hesitate to strike down laws that are not obviously unconstitutional (though what counts as obviously unconstitutional is itself a matter of debate). Precedent also plays a major role in the application of “judicial restraint.” Even though a law may seem a clear breach of constitutional precepts, if it’s the result of a long-established and generally accepted trend, then “judicial restraint” can be used to uphold it — a curious, priority-reversing application of the principle. Applied in this manner, “judicial restraint” becomes a recipe for specious reasoning and sophistry. The same applies to “minimum scrutiny,” but with fewer qualifications.

In response to the Kelo decision, many states passed laws limiting or prohibiting the use of eminent domain to take private property for conveyance to another private owner. California, however, was not one of those states.

When housing prices burst in 2008, California took the biggest hit, and San Bernardino County was punched particularly hard. Entire neighborhoods were “blighted” by foreclosed properties, with boarded-up windows and unkempt facades. Property values plummeted, in some cases by 50% or more. Nearly half the mortgages in the county are now “underwater,” meaning that the value of the outstanding loan exceeds the market value of the properties.

“So,” the Economist explains, “the county and two of its cities (including Ontario) are considering an innovative proposal: to use the powers of eminent domain to seize underwater mortgages from investors and chop them down to size.”

The scheme was hatched by Mortgage Resolution Partners (MRP). As theEconomist elaborates, this is what would happen:

MRP would work with officials to identify mortgages ripe for seizure; at first, only homeowners who were up-to-date on their repayments would be eligible. MRP would drum up private investment to finance the mortgage purchases at prices determined in court (as in all eminent-domain cases). Once the loan is bought, the principal would be cut and the repayment terms eased. A win for the homeowner; a win for the local economy, thanks to growing consumer spending and (with luck) a revived construction industry; and a win for MRP, which earns a juicy fee from each transaction.

But there would be losers: mortgage providers and investors in mortgage-backed securities. If the scheme were implemented, the American Securitization Forum (the industry’s round table organization) fears it would choke off credit and depress house prices. And there are other problems.

As the Economist notes, “Thomas Merrill at Columbia Law School thinks MRP might struggle to convince a court that it has satisfied the ‘just compensation’ clause of the Fifth Amendment.” Additionally, affected mortgage providers could sue San Bernardino County and MRP for interference with valid contracts. It could be a costly nightmare for the municipalities that implement the proposed plan.

For these reasons the plan may go nowhere. County officialshave emphasized that no decision has been made, and there are signs that the process is stalled. However, merely the concocting of such a plan may open a door for some very ingenious applications of the already broad Kelo decision.

Are these really “unintended consequences”? No. Something like them could easily be predicted. To judicial originalists they are — with a nod to Donald Rumsfeld — unwelcome “known unknowns.” That is why, anticipating them, originalists advocate parsimony in the interpretation of law. To modern-liberal jurists, the consequences might also be “unknown unknowns,” but they are unknowns redolent with creative possibilities for increasing the power of the state to provide what modern liberals regard as social justice.




Share This
Syndicate content

© Copyright 2017 Liberty Foundation. All rights reserved.



Opinions expressed in Liberty are those of the authors and not necessarily those of the Liberty Foundation.

All letters to the editor are assumed to be for publication unless otherwise indicated.