The Little Short

“The successful man is the one who had the chance and took it.” – Roger Babson

I watched The Big Short recently. Having read the Michael Lewis book, and having lived through the rise and fall of the housing bubble, I can attest that the movie does justice both to the book and to history. And the filmmakers manage to make the discussion of complicated financial instruments understandable in an entertaining way, without dumbing it down.

The main takeaway from the movie is that Wall Street is rigged. The big guys will always get bailed out, and the rest of us will always get stuck footing the bill. Wall Street control the levers of power in Congress, the Administration, and the Federal Reserve. This should not be a controversial proposition to anyone who has been paying attention the last 6 1/2 years.

But the movie (like the book) departs from reality when it depicts its handful of protagonists as the only ones who saw the housing crash coming. Many people saw the housing crash coming. Even I shorted Countrywide and Impac Mortgage. I got my tip reading the now-defunct I am Facing Foreclosure blog by Casey Serin, an unemployed 24-year-old who had obtained financing from banks to buy at least seven houses. When I saw the promissory note that Countrywide took from this broke deadbeat in lieu of foreclosure, I knew we were on to something. Others learned, or should have learned, about the housing bubble by clues like that in the film when strippers were buying multiple properties all over Florida with little or no money down. Even mainstream publications like The Economist were writing about the housing bubble well before the subprime hit the fan.

What set The Big Short‘s big winners apart from others who saw the housing bubble was capital and leverage. The heroes of the film, Dr. Michael Burry and Steve Eisman (Mark Baum / Steve Carell in the movie), were already managing hundreds of millions or more when they made their mortgage bets. The two hedge fund startup kids Jamie and Charlie who the film claimed to have started with $110,000 and turned it into $30 million? Not so much. Jamie is really James Mai, who started Cornwall Capital to manage his father’s considerable fortune earned as a pioneer of leveraged buyouts on Wall Street.

In addition to capital, what made the Big Short so big was leverage. Punters like us can short a stock, and make 100% if it goes bankrupt. Or we can buy put options, which might pay off a little richer if we get the timing right. But the big Wall Street guys had access to credit default swaps which gave them leverage to the crash that individual speculators can only dream of. Instruments like these are accessible to those with the “ISDA” agreement that Jamie and Charlie were so desperate to get in the film.

So yes, congratulations to those who were in the right place at the right time, with the right capital and leverage, and made the trade of a lifetime.

The rest of us will have to be content with the psychic rewards of the occasional well-executed Little Short.