Money for Nothing

In discussion with Amanda Lang on whether The Big Short accurately depicts the 2008 financial crisis

Image from Youtube
Image from YoutubeYouTube

The most memorable scene in The Big Short lasts only a few seconds, and doesn’t contain any real dialogue. It’s a fleeting shot of a poor Florida family, parked at a gas station, expressions of thinly suppressed desperation etched on their faces.

We viewers don’t know much about the mother and the kids. But we’ve seen the father before—a Hispanic-seeming gentle giant who’d popped up as a minor character earlier in the movie when Wall Street protagonists are investigating the Sunshine State’s overheated housing market.

The subprime adjustable-rate mortgage on the man’s home, we learn, is three months delinquent. We also learn that the money had been borrowed in the name of the landlord’s dog. When informed of his landlord’s financial distress, the gentle-giant tenant frets that the bank will throw his family onto the street—even though he didn’t do anything wrong.

The brief, almost mute, gas-station scene at the end suggests that this is exactly what’s happened to them. The family now sleeps in a car—a tear-jerking capsule stand-in for the legions of real-life American families who were victimized by the 2008 sub-prime mortgage collapse.

If The Big Short were a conventional Hollywood drama, this fellow would have been a major character, occupying a huge swathe of the plot. Indeed, the whole arc of the movie would have been Virtuous Little Guy versus Evil Wall Street Plutocrats. But it is part of the genius of screenplay authors Adam McKay and Charles Randolph that they completely avoid this predictable melodrama.

All of the conflict within this movie (based on the blockbuster reporting of Michael Lewis) essentially takes place between different factions of plutocrat. The good guys aren’t Robin Hood. They want to get rich as much as everyone else. But they distinguish themselves by demonstrating some baseline respect for the rules of capitalism. In particular, they believe that worthless assets—such as the cynically securitized junk mortgages and derivative assets at the centre of the movie’s plot (“collateralized debt obligations,” or CDOs)—shouldn’t be priced as blue-chip investments. The bad guys, on the other hand—greedy bank executives, see-no-evil ratings agencies, cowardly business journalists—conspire to artificially prop up the value of these CDOs for the sake of job security and collective enrichment.

It might seem impossible to sustain Oscar-worthy cinematic drama based on this sort of arcane moral typology. And yet the makers of The Big Short achieve it. This wonky film—whose plot centers on financial instruments so complicated that even the people who produced them didn’t fully understand how they worked—has become a hit. It took a full week before my wife and I were able to get into a Toronto screening. Like many others, we came out proclaiming it brilliant, profound, and often hilariously funny.

But was it accurate? The financial world that The Big Short depicts is an over-the-top egotopia of alpha males boasting crassly about their fat paydays. At one point, the good guys enter a Florida bar to interview a pair of mortgage salesmen who specialize in selling rip-off mortgages to immigrants who’ll never be able to sustain the payments. Over drinks, they explain how selling a conventional mortgage can earn them a two-thousand dollar commission, while the subprime variety nets them five times that amount.

“Why are they confessing all this?” asks a good guy.

“They’re not confessing,” answers the other. “They’re bragging.”

This is not a world I know well. I’m not a business journalist. And even within that sub-niche, there are relatively few writers who have had the chance to observe the world of finance and banking at the highest level and interact regularly with its biggest players. But fortunately for me, one of that rare breed—Bloomberg TV Canada host Amanda Lang, formerly of the CBC—also happens to have seen The Big Short, which she says left her with “strong feelings.” And she’s agreed to answer a few questions, beginning with: How much of what I just saw is true?


Unfortunately of course, a lot of it is very true. We know that an explosion of mortgage lending in America fuelled the largest housing bubble in history—and that at its zenith, that lending was backed by products that were at best flawed and at worst corrupt. The weakness of the movie, for me, was that it played on stereotypes and even caricature: Evil Wall Street types preying on an unsuspecting public, in alliance with a legion of grassroots hucksters happily participating in the CDO scheme.

But (your gentle giant notwithstanding) for every broker willing to give a mortgage—or five—to someone who couldn’t afford it, there was someone on the other side of the transaction, taking a loan they knew they couldn’t pay.

As you note, the movie helped people understand how much harm was ultimately inflicted on the American economy by the repackaging of mortgages into complex investment products. What The Big Short did not communicate was that this financial engineering actually did some good for a while: By offsetting investment risk through securitization, more people could access mortgages, which allowed them to buy homes and build up equity. That created wealth for the individual and the whole economy.

As with Frankenstein’s monster, of course, the good was overtaken by the bad. Once the high-quality mortgage market was saturated, banks began looking for more customers, which meant moving on to riskier prospects.

But even with subprime mortgages, the process of securitization made sense: By packaging all those loans together, CDO issuers could produce an asset that was less risky than any single underlying mortgage—in the same way that an indexed stock fund is less risky than any one stock. That, too, helped open up home ownership, until the build-up of non-performing mortgages in these securitized assets became unsupportable.

There is no question that ratings agencies are to be faulted for their inability to understand, let alone properly rate, the CDO products they were charged with analysing. And their inherent conflict as a service provider to the banks was (and is) a real problem. There also is no question that financial journalists were slow to question some of the practices of Wall Street. But in all of these cases, naïveté played at least part as much a role as greed: As Alan Greenspan said, it seemed reasonable to assume that the banks would not engage in behaviour that would threaten the system, including their very existence. We now know that they can and will.

Right now, somewhere in a back room on Wall (or Bay) Street, someone clever is creating a new financial instrument. For a while, issuers and investors will benefit. But we—regulators, lawmakers, ratings agencies, journalists and the public at large—need to be vigilant that those good innovations don’t again produce monstrous consequences.


Let’s talk specifically about the The Big Short’s treatment of the beat reporters who cover the financial industry. And again, I’ll start things off by describing a great scene from the movie. Two of the good guys, seeking to blow the lid off crooked elements in the CDO industry, pay a visit to a school friend who’s now covering the bank beat at the Wall Street Journal. When they set out the shocking facts, the reporter looks interested and sympathetic, but he explains that he just can’t do the story: For a journalist whose job requires that he keep on good terms with the big banks, a story like this would be career suicide. He knows he’s being cowardly, but tells them: “You try being [brave] with a three-year-old and a wife getting her masters degree.”

While The Big Short focused on American financial markets, surely the same sort of cosy relationships between journalists and bankers exist in Canada. (Some might suspect it’s worse here, because of the concentration of capital and influence within our banking oligopoly.) I will not dwell on your own past CBC-era controversy, in which you were accused of covering companies you may have been too close to, because it was all thoroughly documented a year ago. But at the very least, that story does illustrate how business leaders and business journalists often travel in the same circles and develop common interests. During your time as a business journalist, have you witnessed situations like the one portrayed in the film—when a bad-news story about the financial markets was passed up for cynical reasons?


It’s a fact of life that any beat reporter—and this is as true for health and sports reporters as much as it is for those of us who cover business news—is that you are constantly relying on many of the same sources and subjects. Being aware of this fact forces us to be as fair as we can be.

Sometimes, you can’t please anyone. I once had a senior executive at an investment bank, someone I consider a friend, scream at me about a documentary I’d done. But he’s the exception: the vast majority of the people I work with know when they’ve been treated fairly.

As for the journalists who may have been tipped to what was happening in the CDO market, I’m not going to question the truth of what The Big Short portrayed. But I will say that the scene at the Wall Street Journal sounded to me like a reporter getting the scoop of a lifetime. And the journalists I know—especially at newspapers on the level of the WSJ—go to great lengths to get scoops, not bury them.

I can tell you as someone who covered all of these events back in the era before the US subprime crash, there was a great deal we simply didn’t know. I recall the day we learned that investment banks were happily taking two sides of a trade, pitting one client against the other—and the shockwaves of that revelation. It was much worse than anyone really imagined.


To conclude, let’s talk about the weirdness of watching The Big Short in Canada. New York is just an hour flight from Montreal, Ottawa, or Toronto. And yet I felt like the events being described in the film were taking place on the other side of the world—because Canada never really had any true “subprime” mortgage market, and because our financial institutions are more risk-averse than their American counterparts, and subject to tighter regulations. As a Canadian, should we feel smug watching The Big Short? Were our bankers and regulators just flat-out smarter and less corrupt than their American equivalents?

When I began working in Canadian opinion journalism two decades ago, I spent a lot of time reading articles that made the case for bank deregulation. These days, you never see that: The 2008 crash became the trump card in every discussion of the subject.

We were smart. The Americans were dumb. Is it that simple?


Such a Canadian narrative! After the credit crisis I used to joke every Canadian banker was risking a broken arm from patting themselves on the back. But remember, if our big banks had had their way, they would have evolved to be a lot like US banks. The fact that our politicians and regulators didn’t allow it is certainly reason for self-congratulation. But here is the key point, which is my central criticism of The Big Short: Banks aren’t “good” or “bad.” They are corporate structures with one goal and one goal only— to maximize return on capital within an accepted parameter of risk. They will move to the very marginal edge of that risk—the edge defined not by them but by law—every time. And so if we don’t want another catastrophe, it involves regulation, not bank culture. That’s not to say there weren’t bad apples—individuals who knew or should have known that there was genuine fraud going on in the subprime market—but that’s not the norm.

Those of us who believe in capitalism, who think it’s one of the most positive forces for good around, have to be willing to stand up and point out its limitations, which this movie puts on display. In the case of US banks, there’s a strong case to be made that they should look like they did before the repeal of Glass–Steagall legislation (which prevented a bank from engaging in both deposit taking and investment banking). The UK is undertaking a full overhaul of what its banks are permitted to do, and how and where they are permitted to do it.

Only an informed citizenry can make these changes happen. The Big Short went some way toward helping inform us. But my fear is that as entertaining as the movie is, it stopped . . . a bit short.

Jonathan Kay
Jonathan Kay (@jonkay) is a journalist, book author and editor, and public speaker.