Thursday, January 14, 2016

“The Big Short” Movie: My Review

Yesterday, I saw “The Big Short,” a movie based on the book by Michael Lewis. It was announced today that it one of eight films nominated for the “Best Picture” Oscar award. It is an entertaining movie, but I doubt that it will have much, if any, impact on the regulation of financial markets or financial institutions.
The movie focuses, as does the book, on a few, rather strange persons (fictionalized in the movie) who saw that there was a housing bubble of major proportions and that, when it burst, many of the mortgages which had been packaged into mortgage-backed securities and subsequently into collateralized debt obligations (“CDOs”) would end up in foreclosure. They decided to short the market in a big way and were ultimately rewarded.
For those who have not heard of CDOs and credit default swaps, the movie, while both entertaining and in places comedic, is a painless introduction of some of the practices that led to the 2008 financial market meltdown. It is, though, by necessity incomplete and a bit misleading.
In particular, the description of synthetic CDOs, which features Richard Thaler, an economist playing himself, and actress Selena Gomez in a Las Vegas casino is incomplete. Rather than trying to explain that synthetic CDOs were created by putting in them credit default swaps referencing mortgage-backed securities, instead of the securities themselves, the movie’s explanation of this describes the betting that this structure facilitates.  
The reason that this is important is that it was the presence of short sellers that enabled the creation of the credit default swaps that were put into the CDOs. How much this exacerbated the financial crisis has been debated. “Yves Smith” of the blog “Naked Capitalism” is rather caustic on this point.
While the real life characters on whom the movie is based were not that big nor that significant compared to someone like John Paulson, who was also shorting the market, in one instance controversially involved with Goldman Sachs in creating a very bad synthetic CDO (“Abacus”), they were more opportunistic in seeing the trade of a lifetime than heroes. To be fair, the movie does not portray them as unalloyed heroes, but it is clear for whom the audience should be rooting.
Also, while the bailout of the major financial institutions is implicitly criticized, it is left unmentioned that the short sellers benefitted from the bailout, in particular that of AIG, which ended up holding much of the risk that other financial institutions wanted to unload through the use of credit default swaps. If the government had not undertaken through TARP and other measures to bail out the Street, the counterparties to the shorts might not have been able to come up with the money they owed the shorts.
This is all perhaps more complicated than an entertainment movie could put into a story, but it is worth reminding ourselves of what happened. The Street needed the shorts to create the synthetic CDOs. The synthetic CDOs were easier to construct than CDOs with actual mortgage-backed securities, and, moreover, even with the flurry of mortgage lending there was not enough mortgages to meet the demand for CDOs.
The movie implies that it was mainly a few people with somewhat inadequate social skills who saw that there was a housing bubble. Plenty of people saw it; it was just as obvious as the tech stock bubble that preceded it. The failure of the Federal Reserve, and in particular Chairman Greenspan, to see that there was a bubble and to use the Fed’s existing authority to rein in the abusive lending practices in subprime mortgages was a gigantic mistake. There is, though, plenty of blame to pass around. (The Onion had a funny article in July 2008 headlined “Recession-Plagued Nation Demands New Bubble to Invest In.”)
What many did not see, though, was the major financial calamity that would result when the bubble burst. After all, the end of the tech stock bubble, while unpleasant, was manageable. The bursting of the housing bubble and the subsequent financial crisis is still affecting us eight years later.
The shorts were right in realizing that the bursting of the bubble would be calamitous. But they were also lucky. While bubbles of the magnitude of what happened in housing and tech stocks are not hard to see, it is near impossible to predict when the supply of “greater fools” will run out and the whole thing collapses. The movie gets at this by depicting the losses and withdrawals one hedge fund manager had to endure while he waited for the massive defaults he knew were coming. If he had been a bit more off on his timing, he may not have had the financial wherewithal to keep his positions until they paid off.  
At the end, the movie criticizes the failure to break up the big banks and the failure to prosecute the fraud that took place. This may make some moviegoers angry, as it should, but I doubt that this movie will change the political realities.
Nevertheless, the movie is worth seeing. The acting is first rate, it captures the characters and the atmosphere of the mortgage frenzy, and, in places, the movie is quite funny. Also, while the explanations of some of the financial instruments are incomplete, it serves to bring some more clarity in an entertaining fashion to those not familiar with the arcana of the Street about what happened.

Wednesday, January 6, 2016

“Netanyahu at War” Documentary – Some Comments

Last night (January 5, 2016), PBS broadcasted an interesting Frontline documentary, “Netanyahu at War.” The documentary focuses on the troubled relationship Israel has had with the U.S while Benjamin Netanyahu has been Prime Minister.

Interestingly, the documentary indicates that Netanyahu has failed to understand U.S. politics even though, of all Israeli leaders, he has the best background to understand this country. He and his family moved to the U.S. when he was seven, and he went to U.S. schools from that time on (including high school). He earned two degrees at MIT and was studying for a doctorate in political science at Harvard but returned to Israel after his older brother was killed in the Entebbe raid. He also was an official at the Israeli embassy in Washington in the early 80s and subsequently served as the Israeli ambassador to the U.S.

This documentary, which is almost two hours long, is well worth watching. The end of the program focuses on the nuclear negotiations with Iran and the dismal professional and personal relationship between Netanyahu and President Obama. Netanyahu’s decision to address Congress in order to urge them to scuttle the deal was clearly a mistake. Since he lost, his actions in defiance of a U.S. President showed that the supposedly invincible Israeli lobby could be beaten. His attempt to convince American Jewish voters of the rightness of his cause also did not succeed. The vast majority of Jews voted for Obama both times he ran. Throwing his hat in with the Republicans, when most Jews are Democrats, was a mistake by Netanyahu that Israel will have to correct. It is possible that Netanyahu mistook his conversations with rich, conservative American Jews as representing general American Jewish opinion. According to Jeffrey Goldberg, who is interviewed in the documentary, Netanyahu and his entourage were sure that Mitt Romney would win the 2012 presidential election, and were like Fox News “bitter enders” before admitting to themselves that Obama had won. (The Israelis would have had better intelligence if they had read Nate Silver’s 538 blog, then hosted by the New York Times.)

There is a lot more to the documentary, including arguments concerning whether Netanyahu’s actions and speeches in 1995 helped create the atmosphere contributing to the assassination of Prime Minister Yitzhak Rabin. Netanyahu was an implacable opponent of the Oslo peace process to which Rabin had subcribed. The treatment of this subject gives both sides their say.

Nevertheless, I have a few quibbles. The first is stylistic. I dislike Will Lyman’s voice of god narration for the Frontline programs, which seems to be a cheap way to stack the deck in favor of whatever point Frontline is making. (How could you possible disagree with that authoritative voice? But I have.)

Also, the program did not indicate the background and positions of some of the interviewees. For example, while correctly identifying Ron Dermer as Israel’s current ambassador to the U.S., there is no mention of his professional ties to the Republican Party as an American citizen and his role in arranging Netanyahu’s speech to Congress with Speaker John Boehner. However, Ron Dermer does not come off all that well in the show unless you totally agree with him. He sounds like many political operatives who show up on cable political shows who do not depart from their talking points.

Also, Ari Shavit, who wrote an interesting book on Israel (my review is here) makes the main point of the documentary at the end that, if things turn out badly, the years 2009 to 2015 will be viewed as a sad chapter in history and a failure of the Americans and the Israeli governments to work together. What is not mentioned is that, while Ari Shavit, who work for the liberal Israeli newspaper, Haaretz, is in some ways a liberal in Israeli politics, he agreed with Netanyahu’s reasons for opposing  the nuclear deal with Iran. This is probably what he was talking about in his interview, but the editing takes away some of the context. (Shavit though did not agree with Netanyahu’s tactics of opposing the American President on this. See “An Israeli Triumph Over Obama on Iran Could Be Disastrous.”)

Nevertheless, I recommend the program for those interested in Israel and the Middle East in general. Now that we see the total breakdown of relations between Saudi Arabia and Iran, the Israeli situation underlines how complicated the politics of the region are. For the U.S., there is no obvious optimal Middle East foreign policy, but the current and subsequent American presidents will have to navigate this difficult terrain as best they can. It is way too easy to get things wrong. One can only hope that they avoid some of the disastrous decisions of some of their predecessors.