How The Big Short Educated A Generation On The Financial Crisis Of 2008

Oscar-winning 2015 adaption of Michael Lewis’ book, of the same name, followed several characters with a finance background in the lead up to the 2007-08 global economic crisis. The individuals ended up profiting heavily from the incident, betting on the collapse of the financial system through bonds that held risky mortgages. The film is often credited as explaining the monetary catastrophe in layman’s terms.

The film ended up using characters played by actors like Selena Gomez, Margot Robbie and Anthony Bourdain to explain the more complex elements of what happened using everyday analogies.

Margot Robbie’s character explained mortgage bonds whilst sitting in a bathtub. The concept behind it was that Robbie would be representing the type of person the community was focusing on at the time whilst the situation was crumbling.

The actress noted that the primary reason for the collapse was the formation and abuse of mortgage bonds. Mortgages can be quite stable assets if rated highly – depending on the recipient – however banks started filling bonds full of risky (sub-prime) mortgages to make more money through people investing in the bonds.

Anthony Bourdain then explained CDOs (collateralized debt obligation) through the analogy of seafood. A CDO moulds together assets such as bonds, car loans, credit card loans, and mortgages to sell to investors. These loans, all from different places, are then put together and sent back out into the market as new bonds. Investors in CDOs can buy into different levels of risk, ranging from low to high.

In the run-up to the crisis, some banks started creating and putting out CDOs with high-risk mortgage-backed securities. Those CDOs however were still rated AAA (meaning very secure) because the rating agencies believed there was safety in numbers, so having multiple high-risk mortgages pooled together was a good bet for investors.

Selena Gomez and Richard Thaler (behavioral economics professor) then explained how synthetic CDOs were created in another interlude using blackjack. Hybrid CDOs were started because there was some initial success in CDOs, as Bourdain explained.

Banks started making hybrid secondary CDOs using different parts of CDOs already created. Think of a car made from the parts of dozens of different used cars. The banks subsequently made synthetic CDOs – the duo explains – that acted as insurance against if people defaulted on their loans in the form of credit default swaps. Amazingly, no one thought the loans would default in what Thaler described as the hot-hand fallacy.

Imagine if Cristiano Ronaldo had scored in many games in a row and people bet that he must score now in every game. People made that bet and people made side bets that that person would win their bet. This process kept going on. Eventually, Ronaldo didn’t score in a game (people couldn’t pay their mortgages) and things came tumbling down. The people that made money in The Big Short bet on that tumble using a mechanism known as shorting.

In simple terms, someone shorting borrows stock from someone agreeing to return it on a specific date. Could be days or years. After the exchange the short seller sells the stock on the market – let’s say for $1000.

On the day the short seller must pay, they go to buy back that same stock on the market but imagine the value has now gone down, instead of it still being $1000 it’s now worth $200. Meaning the shorter buys back the stock and delivers it to whoever he borrowed it from whilst keeping $800 in profit.

This is what ended up happening to numerous characters in the film but on a grander scale.

Industry adaptation due to the film

Founder and CEO of Confer Inc., Yatin Karnik, has 20-plus years of experience in the mortgage industry and was active during the times the movie took place. Spending almost 17 years at Wells Fargo before branching out with Confer in 2021.

Confer has built an optimization engine that can customize mortgage loans through Web 3.0. Aiming to put borrowers in a type of bargaining position with the lender.

The app compares official loan estimates, recommending a lender that is the most favorable for the borrower’s situation, whilst altering the mortgage transaction through the terms to spit out a better offering.

Karnik said on the venture: “My goal is to democratize finance globally, not just within the United States of America.”

“This goal translates to making money easily accessible for those in need and those that want to lend. In addition, making it affordable, available, and transparent to lend/borrow money.”

“Not having affordable financing in place impacts the poor and underprivileged communities, as they do not have access to necessary funds. People saw this on full display during the movie.” He added.

“My mission is to make money easily accessible for those unable to get to it.”

Incredibly, after the crash, there was not much legitimate change to procedures except slightly more safety regulation.

Confer, and other entities, hope to change that through blockchain and the new digital era so there is not a reoccurrence of The Big Short.

Karnik continued, “I genuinely want to change the antiquated ways in which the finance industry currently works – which adds unnecessary administrative layers, does not allow for clarity and the true power of choice for borrowers, and blatantly lacks the implementation of government guidance.”

“There are glaring gaps and a lack of standardization across the financial lending landscape. I aim to bring these crater-sized potholes to light and ensure leaders across the board are held accountable for their responsibilities towards the American public.”