The Big Short Wars
I had anxiously awaited a movie that was coming out at the end of December and I finally got to go see it this last weekend. I’m probably one of the few people who would write that sentence and not have it be about Star Wars: The Force Awakens. I saw that movie, too, but it wasn’t the one I was excited about. I was excited about the Brad Pitt, Christian Bale and Steve Carell movie, The Big Short.
If I have any sort of clout, I encourage everyone to go see The Big Short so you can at least have an idea about what happened to our economy in 2008. Given the box office numbers, The Big Short is going to fall a couple of galaxies short of the number of people who see Star Wars. For some reason, it is more entertaining to see a story about a long ago galaxy far, far away battling the forces of good and evil, than a story about our recent past, and the real world battle of market forces.
I decided to rectify the problem by doing what The Big Short actually does in the movie so very well -- explain obscure financial lingo in an entertaining fashion.
A few, few years ago in our recent past, a bunch of money had vanished from our stock market in the tech bubble at the turn of the century. After that bubble burst and that money vanished, the absence of similar money-making schemes found a new hope in the mortgage backed security. Wall Street Order (“WSO”) will not rest until a new bubble can be formed and even more money extracted from the monetary universe and the pockets of the average person.
Earlier in the 1980s, the Savings and Loan Death Star exploded, plunging the economy into a recession. An even bigger Death Star racked the economy with its tech bubble stocks. Always on the lookout, WSO began to build a powerful Economy Killer which worked like this -- all of the home mortgages were bundled into a group, so money was sucked into one big interstellar investment pot. This arrangement attracted a lot of money from pension funds and other conservative investors, because even though the investor was investing in debt, the promised future payment was backed up by actual houses.
Yet, this was only the first level in building the Economy Killer. Some of the mortgages in the bundle didn't attract money because the underlying mortgages just weren’t that strong -- inflated values on the house, shaky borrowers, and poor underwriting. By taking these leftovers and bundling them tighter and getting the ratings scientists to say they were worth investing in, more money came in from investors to add fuel to the Economy Killer. This fuel of concentrated bad mortgages was called a collateralized debt obligation or CDO.
The Economy Killer craved even more fuel, so the WSO created a clone army of CDOs. Theses were copies of CDOs, known as synthetic CDOs or CDO-squared. By making copies and selling those copies, even more money fuel got sucked in Economy Killer.
Some investors were wary of paying into copies of copies and wanted insurance that the clone army they were buying would perform. For this, the WSO developed an insurance program called "credit default swaps" and began collecting premiums which added even more money flowing into the Economy Killer. Soon eight trillion dollars worth of cash above and beyond the original value of the home mortgages that started the process poured into the WSO, and the weapon was ready to implode and take everything with it.
Obi Wan Buffett called the Economy Killer a 'financial weapon of mass destruction.' The dark side of the capitalist force -- Darth Greenspan -- overpowered the good side of the capitalist force -- Jedi Master Yo-money. In 2007, the Economy Killer started to rumble. By September of 2008, the weapon imploded, sucking venerable institutions like Bear Stearns and Lehman Brothers into the nothingness. Houses and subdivisions fell vacant and pension funds poofed into thin air. The insurance company, AIG, couldn’t pay out on the credit default swaps as promised and the entire financial system seemed ready to be sucked into the black hole created by the Economy Killer. After the implosion, the eight trillion dollars that wasn’t backed up by actual houses simply vanished.
In order to rebuild the world, the surviving rebels, known as tax payers, poured their resources into rebuilding the financial system, so ordinary people and businesses could do things like borrow money. The rebels would like to see a world where the dark side of the force is contained and the peace and prosperity that comes from mature and prudent financial policy reigns. However, there are already dark rumblings and whispers of the building of yet another Economy Killer. If the rebels are going to prevent this in the future, maybe they should think a little bit more about which movies are important, because the sequel to 2008 is one that none of us wants to see.