Going Long on The Big Short
The Big Short is Director Adam Mackay’s adaption of author Michael Lewis’ book of the same name. In the book, Lewis tracks the fortunes of three fund managers who separately decide that the US housing market is fundamentally overvalued, and seek to short sell that market, i.e. bet on a nationwide housing price fall. The movie does a good job of reminding us that hindsight is 20-20: we all know that this happened but when the movie begins in 2005 there was no one calling for a housing price crash. As the movie shows, there were a number of institutional barriers against it.
The movie is well acted, and well scripted. In the film, Christian Bale plays Dr Michael Burry, a neurologist who turns to financial market investing. This is the one character that matches the actual book- Michael Burry is a real person. The other characters resemble the real individuals in the book. Steve Carrell plays Mark Baum, a cynical and hard bitten hedge fund manager in New York who is not addressing a personal tragedy and is channelling his energies into his work. Ryan Gosling plays Jared Venett, a slimy Deutsche Bank salesman who is going “against the Street” and who functions as a quasi-narrator of the piece.
The film catches the zaniness of the CDO boom and the coarse and macho atmosphere of Wall Street at the time. It also uncovers the “pass the parcel” chain of risk shifting which allowed the CDO boom to take place, to the cost of millions who were to lose their homes, to taxpayers who paid hundreds of billions of dollars for a government bailout of affected financial institutions and which has damaged the economy and trust in the financial and political system.
I would encourage everyone interested in finance to see it, and indeed to read Michael Lewis’ books: both his earlier one Liar’s Poker, about his career in bonds in London and on Wall Street during the 1980s, and The Big Short itself. His latest book, The Flash Boys, about high frequency trading (HFT) of equities has also become a bestseller. He has a very entertaining knack for explaining both the complexities of financial instruments, but also bringing to life the colourful personalities who have driven financial innovation.
The Big Short is basically about outsiders who seek to play the system at its own game—and win. Another film, Margin Call, is a mirror to the film, telling the inside story. Zachary Quinto (the new Mr. Spock) is a young analyst in an unnamed investment bank creating and trading CDOs, who works out from mathematical models that they are technically insolvent—real insolvency only awaits discovery by the outside world. This news goes up through the chain of command (Paul Bettany, Kevin Spacey) to the CEO of the bank, an oily character marvellously played by Jeremy Irons. The film captures the atmosphere of an investment bank on the brink of insolvency: the mixture of fear and raw greed, as well as the politics of that environment.
Here is a list of our Financial Services courses.
The course The City and Financial Markets – An Introduction gives a general overview of financial markets and the different products traded
Bond Markets- Introduction and Bond Markets- Advanced introduce the delegates to bonds and key bond concepts like duration and convexity
Raising Debt and Debt Finance covers the actual mechanisms by which bonds are created and sold to investors
Securitisation- an Introduction takes you through the technicalities and jargon of financial markets, bonds and securitisation.
Credit Derivatives – Introduction gives a comprehensive introduction of the world of Credit Default Swaps (CDS). It assumes no previous knowledge.
Financial Analysis – Intermediate gives non-accountants an understanding of how instruments like swaps are represented on corporate balance sheets
We also offer a number of CPD courses for accountants who need to value and report on financial instruments including: Financial Instruments – Hedge Accounting; Financial Instruments – IFRS 9 & the Replacement of IAS39; and Financial Instruments (IAS 39) – Advanced Aspects – Recognition & Measurement.
To find out more about this article read The Big Short & CDOs
Author John A Bolitho, Programme Manager Corporate Finance, BPP Professional Development
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