Is the narrative of "The Big Short" the best explanation of the financial crisis?

I'm David wessell I'm director of the hutchon center on fiscal and monetary policy here at Brookings uh I'm pleased to be joined by Adam McKay the director of The Big Short Don we we have made special arrangements so everybody in this room has become a voter in the Oscars I love it I love it you may notice that the median age of this crowd is about 20 years younger than the Oscars that might help uh Don con uh who's a colleague of mine here at Brookings and uh a vice former Vice un Clapper Vice chairman of the Federal Reserve and is helping to keep uh the world safe as a member of the financial policy Committee of the bank of England Greg EP my longtime friend who's the economic commentator at the Wall Street Journal and author of a book called foolproof about how just when you think things are safe is when you should start worrying uh Danny Moses who was at front Point uh played by race SP in the movie uh I'm tempted to ask you about like restaurants and stuff but it was Adam and I had a whole discussion uh he's now at Seawolf capital and finally Adam Davidson who was one of the co-founders of NPR's Planet Money and was a consultant on the movie uh I'm going to we're going to talk for a bit up here I think you should wait till they say something before you apply uh we're going to talk for a bit and then we'll have time for some questions I'm afraid we won't be able to get all the questions in but uh it's really encouraging to see so many people here and in the Overflow room and I'm sure online as well and I think the reason for that is is because uh the movie has already accomplished what Adam McKay set out to do Adam McKay said he wanted to start a conversation about what happen happened in the financial crisis what were the causes what were the consequences and whether we've done enough to prevent or at least reduce the odds of a repeat and the number of people in this room and in the other room and online is evidence that they have uh started the conversation but I actually think the most remarkable thing is that someone could make a movie about CDs and CB CDO and and uh mortgage back securities and Traders and uh actually do two things of great consequence one is to have the courage to say we're going to step outside the movie break the fourth wall and I'm going to explain to you something and Adam Davidson and I have spent in greip as well spent most of our careers trying to think of ways to explain things to people uh none of us were smart enough to think about putting a beautiful woman in a bathtub with bubble bath and champagne so I give him a lot of credit and I Can Only Imagine IM what people said in Hollywood when he said so I'm going to have this scene with dick Thor from the University of Chicago but the second thing and this is actually says something interesting about America is uh when Adam Davidson told us about doing this event and he M muttered something about Oscars I thought like okay this guy has really drunk the Kool-Aid right this is a movie about mortgage back Securities right it has been nominated for Best Picture best Direction Christian Bale has been nominated for the best actor in a supporting role film editing and writing which is just I think an extraordinary accomplishment so I'd like I'd like to start I'd like to start Adam by asking you so what happens you read Michael Lewis's book and you said this is the humorous funny movie I've always died of making honestly yeah that was kind of it it was uh you know we had done a movie called The Other Guys with uh Mark Wahlberg and will frell that was sort of a a you know a riff on cop movies and when we were writing the movie we kept talking about what's the Jeopardy plot and my co-writer Chris henchi would say like well maybe it's drug smugglers or maybe it's a you know a Kingpin and I was like I don't know man like this was right after the collapse and I kept saying we just lost $5 trillion just disappeared like it seems so quaint to do a movie with drug dealers in it and I said I think I think the villain has to be like some sort of creepy you know hedge fun guy no offense to hedge fun people here but uh and creepy people so as opposed to Charming and Soulful hedge fun people um so I at that point started thinking about could I make a Laugh Out Loud Comedy that was like an allegory for the collapse and we have a crazy producer named Kevin messic who's an EP on this movie who can get anyone on the phone so within like two days Paul Krugman was on the phone and I was talking to him and I was like I want to do a comedy allegory of the collaps and he's like well let's talk about it and we had like an hour and a half discussion and we built this whole movie that even though it was kind of laugh driven uh that was all about the collapse and then in the end I ended with these credits that talked about Ponzi schemes and the bailouts and the movie came out and it did really well but everyone was baffled by the part of it that was about the collapse when they saw the credits they were like where did that come from and I realized that people you know they were busy laughing so they weren't really thinking about the underlying meaning but as a result of that I got kind of hooked on this subject I started reading a lot i' had some very close family members who had lost their homes uh lot of friends who had lost their jobs we had had to downsize our company Funny or Die um so I started realizing name of the company is funny or d uh it is really funny or die yeah it's a website that I don't know who knows it who doesn't but it's a website there we go see I'm the one who knows not you I'm a budget nerd I I don't pretend to be something I'm not of course of course of course but um so I started I just kept reading about this and eventually when you're doing that you come across the big short so I picked it up one night at 9:00 and I remember my my wife was in bed the girls were put to bed and I was like all right read this and I could not put it down and I was like this is crazy this is a page Turner that's about this financial esoterica and then there's these amazing characters in the middle of it and for the first time I feel like I sort of understand what happened with the collapse and I was hooked at that moment I just like this has to be a movie um and from then on I just kept reading about it and doing I I tend to get obsessive so my wife will tell you so I from that point on just started reading everything and watching everything uh and then finally when it came point you know to a point to make the movie uh Adam Davidson came in and he and I would sit in my office for like six hours a day and I would just ask him questions and we would argue and I just kept sort of filtering what happened to like the final goal was that I could tell my 10-year-old daughter what exactly happened with the collapse um for those know Funny or Die Pearl from the landlord is my 10-year-old daughter and so finally in the very end after many discussions and arguments I told Pearl what happened and she was like yeah I think I understand that and that was it then I knew I was ready pear instead of Adam yeah by the way for sure for sure yeah so Adam what was it like uh being the bridge between a financial economic journalists and a bunch of Hollywood comedy writers yeah it uh well it was uh first of all I want to say for most of that time Pro would walk in the room and then run out as fast as possible that's true yeah um I for me when I got my my brother works at Paramount and that's how the relationship started about two years ago he said oh this guy Adam McKay and I oh I love his movies he wants to do um the The Big Short he'd love to talk to you and you know I probably had the same thought a lot of people would have but when the very first time we talked I I realized oh this is just a very intelligent curious guy wants to understand things I think for for me the transformation I I had um I've spent my career at NPR in the New York Times and uh and working hard to make this stuff intelligible but realizing I'm reaching an audience that is already actively pursuing big public policy information doesn't mean they fully understand it but they're they they are taking an active step and I I think like many people I had thought of popular culture movies that play in strip mall or not strip mall or play wherever as you know that that's gonna be you you inherently have to dumb it down and I I think without fully thinking about it I thought either you get to be someone like us where you're a serious journalist talking to serious people about serious subjects or you're you're a silly clown like Adam McKay and um and what I learned from Adam and from watching him make Choice after Choice after choice to keep the substance to keep um keep the the the real information there while also making it funny and Lively and um was that it actually is possible that that this choice I thought I had to make was a false choice and I think um throughout I mean the experience was just as as perfect as imaginable I mean it it was just a wonderful experience but the probably one of the Great Moments was we were test screening it just at a mall in outside of Los Ang Angeles and they show it just to the people who come and then at the end of it they do a focus group with about 20 people and ask them to explain what a CDO is and they explain what a CDO is and uh these were people who didn't know what a stock or a bond really was they couldn't tell you the difference and and it just I mean honestly I feel like right now I'm trying to figure out what this means for my life because I feel like it's over Adam it's over yes or it's just beginning this is the peak yeah yeah because I I think what what he accomplished was this ability to take that deep substance and engage everybody the movie's done very well outside of you know Coastal Highly Educated cities I do understand the Cambridge Kendall Square theater is the single biggest dollars per screen but it's done very well throughout the country so I don't think I think everybody who's seen the movie agrees that it's engaging and clever and we all you know Anthony Bourdain or dick Thor those scenes are just uh remarkable in that they actually explain something that I think uh novices as Adam said I think the big question is uh we know in our society that movies have incredible power in creating a narrative uh uh we know that uh there are many uh Kids In America who all they'll ever know about Martin Luther King is Selma and so and we know that we went through something devastating uh we went through something that most people didn't anticipate uh the the shorts in the book are and the movie are exceptions and we know that there that we that there will be policy choices made and sometimes policy choices are made by politicians who get their information more from movies than from brooking's uh white papers so we have to worry about that so I want to talk a little bit about is this the right narrative what does it get right what is it complete and what it isn't complete but I want to start with you Danny I mean you kind of live this thing so when you see the movie or read the book does it resemble anything that was going on in real life uh certainly I think having worked with Michael Lewis on First's article on Vanity Fair in 2009 and then what turned out to be a book so first he thought it would just be an article he says wow I actually think I can turn this into a book and Michael Lewis was doing what Adam was doing Adam Michael was doing for a book what Adam was doing for movie how can I tell the audience and explain this information in a way that people will understand Michael did it uh he had more pages to work with you know obviously than you did Adam but uh he was able to have it come across and then it hit the public mainstream um and then in 2011 uh Paramount came around and said this may be picked up as a movie Michael Lewis at that point says it probably won't be but just sign whatever it's fine uh so I'm all right sign your life rights away that's a great idea so uh that happened in 2011 and the project was pretty much dead I never kept up with it I wasn't really paying attention to it and then a little a little over a year ago or more than that now um Adams group picked it up DD Garder Brad Fitz grp picked it up plan B and uh decided to make it into movie so moving I I thought they did an incredible job I actually thought watching the movie you didn't really have to know what a a CDO was to understand the tone that was being portrayed in the movie you probably didn't think we're watch the movie I want to figure that out I want to figure that out because Adam was able to express I think the tone of what it was what Wall Street was doing what people were buying that it was a bad product that it was exploited those type things so in that sense yes the movie did a great job explaining it but I think the way they explained it took the pressure off of actually having to define those things in the way whether it was fourth wall or whether it was just applying it to what was going on in the world people losing their homes Wall Street people not going to jail things like that so in that sense it captured the element in time I think for what Happ did you really go around in Florida knock on them doors to see if people were there well we went to Florida and Adam am I allowed to critique the it's a nonfiction uh there was no alligator chasing us obviously time there were alligators present I'm certain of it they were in the backyard but we never saw any of them but we did Channel check neighborhoods in Miami we did it in Las Vegas we did it in California just to see what was actually happening um so it was it was it was interesting to re to relive it again once in a book and then in a movie is obviously uh surreal yeah yeah so Greg you've written about this uh do you think this is the right narrative let's take for that everything in the movie is a pretty good representation of what happened to the shorts and everything is this a good way to tell people what just happened it's hard for me to answer that because it's like asking well would a movie about the assassination of arch Duke France Ferdinand be the right way to tell the story of the first World War I mean that is a great big octopus of an event whose roots go back decades and a lot and when you have something as colossal and large and destructive as the global financial crisis I don't think you could come up with a single story and make a movie about it that does the entire thing Justice what I love about the movie is what you said at the beginning is that it takes prob the hardest part of the story to tell which is the the um abstruseness of the finance and and breaks it down into Easy Pieces even for those who cover this stuff for a living this stuff is hard and like everybody in my direct family their eyes glaze over and they fall asleep or they change the subject whenever I try to talk about what I do for a living so if I can get them to see this movie maybe they'll actually stay awake long enough for me to tell them what I did that day um so I think that's a real thing but where I would um where my interpretation differs from Adams is that like he's he has a very moralistic uh kind of undertone to the movie and it comes up very strongly in theota at the end and I think that that's kind of simplistic because um green bad incentives and criminality are evergreens they did not suddenly erupt and we didn't have five more of it in five times more of in the 2000s than other decades the question has to be how did those everpresent features of humanity somehow also catalyze into a crisis that's damaging and for that you have to turn into the broader forces which really don't get talked much about in the movie you know why were interest rates so low why was this giant pool of money the name of this fabulous um research series that Adam head headed up like all these Financial like we talked about all these derivatives the people who are designing these derivatives thought they were fixing flaws in the system that made it um unsafe and in fact they were actually doing the opposite a lot of the the people who um were closest to the mortgage Market lost the most money I mean dick F lost his company you know like Angelo mailla lost his company all the all the heads of all those companies who are on the wrong side the shorts lost their jobs most of them some of them lost their companies they were drinking the Kool-Aid they so when the question comes down to uh was it criminality or was stupidity I guess Adam you probably are more on the criminality side I'm probably more on the stupidity side but even we sort of leave it as an open question I mean there's a fine line between both one of the themes of the movie is what's the difference between criminality and stupidity and pride so but anyway continue yeah so and um but the more I thought about it afterwards the more I also began to realize that even if you're like me and you tend to think of these sort of like Global forces going on those forces actualize themselves for human beings okay we've just seen it in the panic in the markets for the last few weeks smart people like us and Olivia Blanchard are going around scratching their heads trying to figure out why the markets are panicking because the markets act through human beings with their belief systems and their incentive systems and we need stories like The Big Short to remind us of the human beings who are actualizing these forces I'm just talking about there are reasons that we cannot explain using economics why sometimes housing uh bubbles inflate and deflate and don't cause a crisis and sometimes they do and so that's why I'm glad we have this movie Don does it resemble anything that you saw from the inside uh yes I certainly had some bad flashbacks there Bear Sterns was going down I think if I could expand a little bit on Greg's points to me the Kool-Aid was partly uh importantly about 20 years of prosper erity with very few recessions 25 years of prosperity something economists called the Great moderation business Cycles hadn't been abolished but they were much narrower economies recovered they didn't happen very often house prices always went up so I think there was a huge amount of complacency in the system in the the point is raised in the movie and certainly in the book who was on the other side of these trades why weren't they more careful about what they were doing why weren't they digging in and I think they thought because oh nothing bad can really happen or if it's going to happen it'll be kind of small because last 25 years that's all that's really happened I think a second point to make in terms of how it got Amplified and magnified is the tremendous complexity of the interactions within the financial sector so people often uh contrast the bust and the housing bust and in both cases I think the loss of wealth wasn't that different but one resulted in a very shallow recession and one resulted in a horrible Great Recession with lots huge unemployment 10% Etc and I think part of the problem was the financial institution it wasn't just that some people made money and some people lost money that went through the financial institutions that are at the heart of our market economy the the cdos and cdss were so opaque no one knew where the losses were coming to rest and so everyone fled so what happened in the fall of 2008 was a huge run on banks on money market funds on everything and that's what really Amplified the shock coming from the housing market was the collapse of the financial system and that's what I didn't see coming I mean I thought in in the middle of 2005 five the Federal Reserve we had a briefing and it said houses are 20% overvalued but unfortunately the other part of the briefing was yeah when they collapse there'll be some problems and it's a bad thing but no one foresaw the kind of the kind of collapse of the financial system that made it so awful Adam let me ask ask you a little bit about the ending so it must be hard to figure out how to end a movie like this and the viewer is is left with the impr question that we didn't do anything M um and I think I'm sure you've heard even today given that you're in Washington that people who actually think we did stuff maybe not enough uh wonder why did you leave it that way did you have you had second thoughts uh no no second thoughts but I I think we talked about the idea that you know I think at this point there's no question the banks have continued to grow I would say they they are still too big to fail I would say you look at the ratings agencies no real Beyond paying some fines nothing really happened to them no one was put in jail except for one Banker uh to me yes Dodd Frank had some great stuff in it so that's fine uh but I I don't think it went far enough and I think as far as the recovery that we've had we've seen that it's been a recovery more for the top 1% and the 99% has had wages that are flat um but just back to what these gentlemen were talking about real quickly which I think is important I I think there's definitely some very large macro forces in play that contributed to the collapse but I think it can't be downplayed the hunger that these Banks had once they created these uh esoteric Securities that they were selling these products once they started making money off these nbs's you saw banking as far as a portion of GDP in the 70s go from 6% to at the peak of this bubble 24% so there was a massive hunger going on in banking for these mortgages to fill out these products and I think to say that that's just a byproduct of you know a bubble or or certain larger macro forces isn't exactly correct I think there was clearly a fine line between stupidity blindness and fraud that was in action and everyone was getting paid at every level of this um so anyway just to answer that yeah Adam Adam what you what did you think of the ending um you know I'd say the biggest fights we had and that's why we're sitting on opposite ends of the table yeah we can no longer be in the same room together although we agreed through lawyers to be here together tonight but um um you know I think we talked a lot about about the ending and um can I say one thing yeah Davidson gave me the ending of the bespoke trunch opportunities which the very ending of the movie gave me right in the edit room and I was like that is perfect yeah I dropped your mic oh um so so I I mean look I I think um I'm fully with Greg that there was and you know much much of my work during the crisis was about there was Global macroeconomic Trends there was a you know I I basically buy the global savings glut story that Brookings uh Ben banki tells I I I you know I think uh China China's currency great regime and you know tepid growth in Japan and Europe contributed to Global Capital Market imbalances that created the conditions for some kind of bubble somewhere this desperate search for yield um and I did Pitch to McKay that there'd be like 45 minutes in the Middle where I explain all of this but you couldn't even shoot it to humor me and um and showing his good sense once again yeah right but I think that been in a bubble yeah but I um I think that for particularly for an American audience but I think for a global audience the the one of the major lessons I learned in this crisis and it really happened when I truly learned what a CDO is and understood this product and learned that this product cannot and and I I don't want to go into too much of it but a CDO is there's basically a sub there's a mortgage they just saw the movie they they saw the movie okay good and they did it better than you going to yeah yeah yeah yeah I help that but um so the this CDO cannot exist in an environment where there is aggressive regulation it can't exist when there's what I before the crisis believed in a you know a truly self-correcting market and the the CDO to me learning what the CDO is and learning that this thing passed through all the checks that I truly believed in that I you know that that I believed in proved to me that the grown-ups weren't as all knowing weren't as um as as solid as I expected but Danny do you think that everything is the same as it was five years ago or have we made some improvements it's very different uh pendulum has swung from one side to the other and I think we'll find a nice medium but I think all the things that have happened from a regulatory perspective Ive are positive to make a sound system and The Dodd Frank and vul rules are are very good the tarp and the tal programs ended up working very well um and now we're going to see the other side of the equation careful what you wish for it's actually the right move but the lack of liquidity now that the Wall Street firms have which makes them not too big to fail which is kind of where we want to get to is creating I believe and will create over the next years to come a lot of volatility um and we've seen some of that recently and it's not so much about the FED raising rates as it is that they don't have your back anymore from a quantitative easing perspective which is great also the FED should be doing what they're doing but I think we have to adjust to the new normal and as Adam's alluding to and and and Greg mentioned I do think that wall Street's incentives um if if they find a product they love whether it's you know whether it's tulips back in the 1800s whether it's internet stocks whatever it is when they see it making money they'll they'll make as much money as they can from a period of time and to Adam's point the systems now change where that's not possible but the lack of liquidity again which is a good thing is going to be posing is going to bring L the most poignant for me the most poignant scene in the movie is when you I don't know if this actually happened knock on the door of a guy who is renting a house paying his mortgage paying his rent landlord isn't paying the thing and then you see him living in the car I mean that uh like I don't really care that somebody at lost money and and because they were in the bare Sterns hedge fund but I care about that guy and and there are things we have done the Consumer Financial Protection Bureau most notably to make that less likely to happen and you wouldn't know that at the end of the movie I don't I'm not saying that you can put everything in a movie but you leave the tone that nothing has actually been done well I would say the big elephant in the room is that our government is still completely captured by the Banks and I think let's not pretend I mean what's happened with Finance you know campaign Finance reform is ridiculous uh I in no way trust our government with the amount of money the banks are funneling into our Congress to to buy to overturn to water down uh you need a strong regulatory arm to balance out a market I mean people forget the free hand of the market quote is preceded by a chapter on mercantilism and the rules that create a free market we don't have that right now our government cannot be trusted to make those changes happen to to be a sounding board and yes DOD Frank was great but let's not forget right now every one of those Provisions is being fought actively there's a a large number of people that want to repeal it completely so I just don't have that faith in the end and I think our ending was Pitch Perfect I think people need to know there's a serious problem still going on great did you want to weigh in well the bankers certainly don't feel they got off that easy they've been fighting tooth and nail all these rules that have come out from the higher Capital requirements exist profitability is the reason to fight it they might as well fight it they're they're a lot less profitable now if you actually look at their return on equity and so on but if we were talk making a movie about the collabs of the NASDAQ bubble we'd be all the regulatory we the discussion we'd be having with well was sarban Oxley good enough now almost nobody remembers sarbanes Oxley but actually in the mid 2000s when our Regulators should have been looking at abuses in the mortgage Market they were obsessed with corporate governance fraud because that was what the last cycle was about and so when I think about the present I'm not really worried about cdos any longer they all blew up they're gone you know there are no by the way market is being written any longer you know after the 87 stock market crash portfolio Insurance disappeared but those same incentives of of greed of of what you were saying that when Wall Street sees something they kill it with too much capital is going on we were talking about this last night Danny like if you look at the price of oil for like four years was Rock Solid at around 100 bucks and everybody said Saudi Arabia will never ever let the price go below $90 and so all the banks who can no longer make money in h uh in real estate they poured money into energy and Danny I know see some opportunities to profit energy fund unfortunately now I believe and that bubble is now actually in the process of deflating now I believe that that actual deflation of that bubble is causing a lot of pain right now in places like North Dakota and Houston but I also believe it will be far less uh traumatic than the collapse of the housing bubble was because you don't have the same confluence of so many things and because some of the regulations and the natural pullback from risk that occurs after an event like that has prevented the same buildup of risk that made so let me get to Don so don what do you think where have we done some good stuff and where do you think are the biggest gaps so I think we've done a lot of good stuff in the banking system I agree with Adam that pulling back from it would be a problem a mistake and I worry about the people who say they want to repeal Dodd Frank uh I think it's kind of ambiguous you have the far left and the far right who both hate the big bank so how the how all that's going to work out I know but I think we've gotten to a much better safer place I agree with Danny's uh comments on this but I also think it's important from a regulatory perspective to recognize that the incentives are there to go overboard and you need the regulations and the C the regulations in place to prevent abuses and the capital in place to absor absorb the losses in the financial system of bad things happen the fact that the Regulators in the US and UK and elsewhere have gone to stress tests on the banks are is very helpful so they they stress against this kind of thing I think where we're less complete is outside the banking system so as the banks get more regulated Finance migrates to other places The Regulators are perfectly aware of this and they're looking at it but the laws make it much harder to regulate once you get outside these heavily regulated Industries like Banking and broker dealers so I think what we need to be really careful that regulating the core doesn't create problems outside and what about the rating agencies Adam made the point that they somehow seem to have gotten off Scot free they're doing really really well yeah I that's a disappointment to me also so I think there have been a lot of changes made but I wonder if there's enough the basic model is a very difficult model it's the a model where the issuer pays and so the incentives are to make the issuer happy the other side of this is you don't want to get a bad reputation that you're not doing good good work um but the incentives to make the issuer happy as we saw in the movie are very very powerful that was a pretty hard it's hard to change that model the it used to be that the the purchasers paid investors investors paid and then the Xerox machine was invented and I'm not kidding and then so one investor paid and then distributed it all so uh they had to go to the issuer pays it'd be great to come up with a different model where the incentives were lined up better with the public interest Adam so yeah I wanted I one of the things that that I got from working with McKay is a sense of of moral outrage that I think we wanted people to leave the theater with and that was did not come easy to me I feel like I come from the world of sort of calm Brookings institution panels where you you you say things that are very calm and reasonable like I believe that rent seeking regulatory capture is a deep issue in America I think is there any you must be you must be at some earlier iteration of you're dating yourself yeah but let me ask are there any PhD economists in the room who don't think that regulatory capture and rent seeking are really serious issues among the financial services I think I see some PhD economists I think we all know that's a deep deep issue in our country that something has changed somehow we can discuss how in the last 40 years or so where Finance has shifted and this is not a fringe Lefty view this is a mainstream core view held I think it is the consensus view of economists that that um the way a major way the financial services industry makes money is through rent-seeking and Regulatory capture those are fancy words for the way I think about it is you can make money by creating new products and services that benefit people or you can make money by transferring wealth from those who do create good new productivity enhancing products and services to yourself and we see that very clearly in you know Farm subsidies where you know soybean Farmers or something get money that we probably all agree they shouldn't get but they do because they have three congressmen the the banks really do have all the congressmen because every Congressman has the biggest bank they have a lot of that's not fair you know on of Bernie Sanders and jar Brown there's a few exception seven so yeah only 532 of yeah but what just if I can just say so I think the the outrage the the the outrage that that viewers leave like I I don't the two minutes at the end of the film that I would have written are different maybe from what Adam would have written although maybe not all that different but the outrage that we saw people leave I think is the right outrage that's the right register to engage our economy and I wish more people Danny did you want to no I was gonna say I want to go back to yeah go ahead let's go back to Don's comments um because I think it's really important to understand that it's a secular shift right now on Wall Street is not cyclical what I mean is that the jobs that are being lost right now and the fixed in come businesses what we call Fi businesses are permanent um they're adhering to they're they're doing the work that do Frank volar rule are supposed to be doing um they're already doing it so the behavior has changed so what it does is it creates which is what we want a not too big defail environment where wholesale funded businesses are being created if you have a product that survives that's wholesale funded and does well you're going to get rewarded for it if it doesn't it goes out of business and it won't affect anyone in this room except the people that had money invested in the firm and that's kind of where where we want to get to and the second comment I just wanted to make on rating agencies and Adam does a great job in the film and I think it's really important to understand this is that the first meeting we ever had it was Vinnie and I in early 2006 with the rating agencies at a conference in Florida and Vinnie has Vinnie was he was great in the movie he was portrayed great but there was a there was a moment where the Moody's representative was Moody's not S&P their first meeting said to us we said well show us your models how do you look at how do you look at subprime bonds how and so they showed us what bonds look like when the Market's up 5% housing when it's up 10 when it's up 15 and at that point it'd be going up every year we're like well where's your um flat uh model for flat home prices well we don't have that wow and where's your down model well that doesn't exist and it was at that moment that we said to ourselves okay and Vinnie had a tell Vinnie had a great tell I didn't come movie Vinnie would say Vinnie would do the the the fist to the cheek and then I look I knew we had something you know so uh there's those were the kind of things that were going on behind the scenes that not behind that actually were happening and this was a conference where it was all fixed income investors and so um anyway so want to just comment on those on those well I was just curious Danny because you're obviously still active and working like what do you think of the SEC like is that something that scares you is that something you're aware of I can't comment on the I mean we're sorry yeah thanks for coming enjoy the deal no uh can I make a point here though because I mean we heard this over and over again by the way when we would talk to people working in the industry they would literally laugh about the SEC they weren't sophist you know I don't think I just want to say and I'm not going to go after the SEC I'll actually you did not you said no but I said there's only so much that I don't think I actually believe that at the end of the day gregal I don't think the banks realized what they had created what had happened I'm not giving them a free pass I'm just saying it got so big so quickly and it was in so many different places that I don't think think there was a way to actually sum up how much synthetic gambling was going on in the markets because if you create a sell you create a buy you did it in the blackjack table obviously on the in the in the movie but that's really you don't know how many people lined up behind the blackjack table and I really don't think they had a grip and I think when the government went to kind of look to rescue or the first iteration of providing some type of Aid to these Banks I really and Don was probably involved in those discussions I don't think anyone really realized how how big the problem was and I think it kept evolving and evolving to think that all of a sudden Morgan staning Goldman Sachs are at risk because there could be a run on the bank so I'm not defending that situational I'm just saying I I think it was it got so big that it was Uncharted Territory for everybody well I was going to also add uh first of all I one of the most interesting characters in The Big Short he's he's touched on in the movie but he's written about more in the book is Howie Huer who's a bond Trader for Morgan Stanley and he actually like um U um Greg Lipman realizes that there's a big uh short to be had here and he starts shorting the lower rated tranches of the mortgage back Securities but it's very expensive to do that because it's basically buying an insurance premium and every month you're paying out this great big premum so he needs to find a way to like defray the cost so he sells some insurance on the triaa rated portions because even though he correctly uh ascertains that this lower rated stuff is going to go to heck he incorrectly believes bu a Kool-Aid that the AAA stuff will not so this kind of um reconciles why some people could correctly guess that things had gotten out of hand and yet still drive their company into the ground because they had Outsource the due diligence to the rating agencies who had built their assumptions on models built on periods of time that had never seen a home price decline because never one never had happened in their uh you know working knowledge so as I'm often stunned when I uh work in this business how the people I meet I presume a lot of like uh knowledge and due diligence on their part and sometimes it's not there it's funny thing that Goldman Sachs gets a lot of like bad rap but they were on the short side through all this thing and if you take a look in 2008 there's a list that Bloomberg did of how much money all these guys had lost UBS AOG Morgan Stanley it's billions of billions and billions you go through the entire top 20 Goldman Sachs isn't there and it's not because Goldman Sachs is altruistic and honest and they're good guys and so on no it's because they did their own due diligence and they didn't drink the Kool-Aid right many they did they play a little bit both sides you know Abacus but I want to get to the I want to get to Adam's moral outrage point because I don't actually agree Adam that I mean I think that newspapers like moral outrage I mean I remember I'm so old I was covering the treasury when there was the Solomon brother Scandal on the on the treasury thing and I remember Al Hunt I was trying to explain it to Al Hunt I didn't have the advantage that Adam had and and Al Hunt said who was the bureau chief of the Wall Street Journal says I don't really want understand it I just want to know who I should be pissed at right and we did a piece about how the treasury borrowing advisory committee uh met and all that stuff and so he was happy and I kept my job but my question about moral outrage is if I watch the movie I think the people who are long the housing market are evil and the people who are short the housing market are somehow morally Superior is that what you is that what you think it's a very tricky story CU it is real life so what I loved about it was there were no clear white hats or black hats uh I think guys like Danny in the beginning were doing their job I think they believe that the market when there's a bad investment you should find the counter investment and that's how the market corrects and when I've talked to all these real people I get this sense that they believed in the market and then there's a moment where they realize the market Market has been corrupted on numerous levels and I sense this deflation especially from jimie and Charlie they almost to this day are so angry and it was like they were told there was no Santa Claus when they were six and they're so hurt by it uh but if you look at what Danny did with front point and what they targeted with Steve eisan it was always corrupt companies it was always companies that were you know way over their skis or full of Pride um so I I don't think the morality of the movie really falls into Longs and shorts or the investment I think one of the the moments of the movie I'm most proud of is in the end when Mark bomb AKA Steve eisan makes $200 million on that rooftop and everyone feels crappy about it including the main character and we were just saying like when when in an American movie does that ever happen like normally it would be you'd play I Feel Good by James Brown and he would dance off and I think that's really kind of what the movie is about which is profit at what cost you know wealth at what cost and what is you know for the character of Mark bomb in our movie uh at that moment he feels like he's become one of the rest of them and it it destroys them um so the morality is very ambiguous because it's a system that's like a wood chipper it just chewed everyone up I mean there's I I can't think of any like real clear Heroes that came out of B uh and that was important to us in telling the story that's kind of the way we were looking at it interesting uh before we turn to questions anybody want to throw anything else on the table I'd like to pick up a point Adam made which was uh taking the other side of these trades I remember when I read the book first and it came back in the movie these guys had a lot of trouble figuring out how to take the other side of the trade how to short this Market what was inside the bonds we would have been better off if more people could see inside those bonds make that short trade in 2004 and 2005 we might not have had the uh bubble that we had or at least not as high as we had so I think um I the market doesn't really know about morality but it would be great to have a market where it be easy just as easy to take both sides of the market don don you realize you just made an argument in favor of more financial innovision and derivatives as long as it's wisely handled and there's enough Capital andc seems like Morality In the market is transparency I think that's what I would say yeah andet it's also amazing with Danny and his company they weren't you guys weren't into bonds right I mean equities guys he told me he had to buy whole new computers he had to subscribe to I add two more screens to my Bloomberg to watch fixed income prices but we were I would just add to that um we traded equities and we were trading the underlying equities because we focused on Financial Services of the subprime mortgage companies that were public and they were going down so quickly that we couldn't short more there was no borrow availability when you short something you need to borrow the stock to do it they were paying these massive dividends whether how long they were going to do that or not so the cost to short the underlying Equity of these companies was bad so we asked the next question where are the bonds that are on their balance sheet where else can we get access to those and it was that simple and and what was weird is that the equities were dropping if you remember there was a long period of time and Adam kit at across in the movie where the equities of these companies were getting hit but the bonds not the not the corporate bonds of the company but the bonds that they actually created were holding up and so for us it was an opportunity cost it was we can pay two to three% and short these bonds at par and our risk is literally two to 3% unless you think the bonds are going to go much higher than par or short a stock that you're paying basically 30 to 40% per year to keep it short on so ours happened to be an economic decision and then we we kind of got a little bit more confidence little a little more confidence it went on and Adam kind of realized and that you could not have portrayed the Steve eisan Wing Chow dinner any better than you did it's exactly what happened um and watching Steve's face also a great scene a great scene there was so much accuracy I will say the movie was very accurate it's the nooo thing but uh but uh but um it was very accurate and this is how it just kept evolving and every time we'd have a meeting with somebody like is this happening is this really and so you got that across I thought in a great way and you did a great job Adam if you're gonna if you're gonna make another movie about this realm would where where would you look God that's an interesting I don't know uh let me think uh well you know I would look back to Michael Lewis's books but that's a cheat I won't do that to you let me think of my own idea 12 Angry fomc members you know I would probably do a movie about I would probably do a movie about lone sharks is really what I would do I would you know what I would do I would do payday lers that's what I would do I think that's an amazing story and that is a world that obviously is being challenged by Dodd Frank which was great but it's still out there and it eviscerates people that would be a very cool world okay yeah you heard to here first all right we're going to have a lot of questions and we're not going to get them all so I'm going to take like three or four questions will let people respond and it'll take a few more uh there's a guy on the aisle there uh yep the mic's coming to you so tell us who you are and make it short uh my question is very quick I I want to know where oh my name is Mike goash Amalgamated Transit Union I want to know if the question is whether or not the problems you saw that arise as a result of the financial crisis were more deeply rooted in the whole system of capitalism where accumulation of wealth constantly requires more and more investment but on the other hand people don't have enough money to buy the stuff so you need financial you know instruments credit etc etc and that leads to constant bubbles whether it's housing cars schools whatever it is and there sort of that inherent contradiction which your didn't really address in your movie thanks well uh I'm going to get a couple before we oh yeah sure uh is a woman here can you bring the there in the black can you stand up and then pass the mic behind you my name is Alana scker I wonder why the media that covers the finances doesn't disc close didn't disclose the financial Shenanigans at the time didn't see the oil going down from 100 to 27 and doesn't report it to the public thank you okay and why don't you to pass the mic behind you there to gentleman in the with the blue scarf the image of the banker used to be this uh patriarchal uh trusted figure Like Walter kronite with a beard but now it seems that it's more like Gordon Gecko and in Wall Street and I wonder how healthy that is to uh to have the kind of Ivan besy face on capitalism between skepticism and Trust on the other hand where do you okay let me take one more uh is a gentleman on the aisle there Mike Alejandro visera uh thank you so much for making the film I love the way you ended um you said that immigrants and poor people would be BL clim they continue to be so except that now that we know that these loans were made to everybody who who could chew gum and could be lured into these loans uh and in fact immigrants were were targeted for good and bad reasons the good reasons is that they they were often good credit risk they had good credit records uh even though they were they had thin files and in fact immigrants have fa better than native born Americans in keeping their homes say something about that thanks uh all right uh let's see uh Greg do you want to defend the media or do you want me to defend the media uh look make excuses the a lot of uh my colleagues at the journal um then and now and in other organization spent a lot of time writing about the things before the crisis and after the crisis that we thought could lead to a crisis there was no mystery about the fact that housing was a bubble uh we acting very bubbly that there's a lot of shoddy underwriting uh going on we wrote a lot of stories about that I a call mine colleague of mine Greg Zuckerman in the December of 2005 wrote about John pulson shorting mortgage back Securities um I wrote number of stories about how a housing bubble could collapse and and have another things I never understood the esoterica which is a centerpiece of your movie and I think this is another reason why I appreciate the movie which is that I think that a certain level I was if not in I was it was not so much that I was intimidated it was that I was um exhausted I mean is that you you get this jargon thrown at you all the time and these people sound like they know what you're talking about and there's nobody who's not captured by the system who can tell you exactly how it works because everybody who understands how it works has drunk the Kool-Aid and is part of the system um the uh so I I don't Adam if you want to speak of this as well though it's just and the other thing is that there's so many things coming at you all the time I I remember I wrote I spent all the time at the height of the bubble writing a big feature article about how the leverage bio boom was going to bring us all down there's this famous comment by Chuck Prince you got to keep dancing as long as music exps you got to keep dancing he was talking about leverage buyouts and I was wrong lbos didn't cause the crisis right so I would say that um the Press failed um because if we had done a better job we would have people would have heard the Paul Riv cry some of us tried a lot of us fell short and none of us had offices at the Wall Street Journal like the ones that are in the movie yeah just make one comment on that I just want to make one comment that in the book um we turned off uh CNBC if anyone read the book realize we we turned it off because it was too much and and I'm sure Greg and David both wrote pieces and there were there were workers that people that work with him that also wrote pieces it's easy to say that now but from a behavioral Finance perspective no one wanted to hear that the housing market was going to crash you're going to go to a party and talk about that you'll be drinking alone in a corner so I think it's easy to look back now and say oh that that you know you were a man on an island or you were a person on an island if you were making that call and so it wasn't so I just wanted to add that that it's easy to look just one thing and once ago I once again I think it kind of points to the theme I keep hitting which is you know our press now tends to be owned by about five different companies and I think we've lost to some degree that independent press which I do think has an influence on the way these newspapers these networks where they look uh it's just narrowed the f Focus quite a bit I don't think it's healthy for journalism uh that's not entirely true of course there's the internet there are a lot of independent sources out there that are doing great work but I think overall that corporate ownership and that very narrow sort of field of view has hurt the ability of uh our press to do its job which gets back to our government being owned by these institutions Don I think the the questioner uh uh about the the role of the banker in in the US so I don't think it's quite right that the banker was always seen as admirable P patriarch uh JP Morgan and his ilk were uh the great malifa because of wealth got plenty of grief but we have gone to a stage where um working on Wall Street unless you're Danny Moses and a friend of ours is seemed like something wrong with you that have do you think we've gone too far in demonizing finance as part of the uh trying to bring it under control I think it things got way out of balance and all the brightest graduates from the the best schools were going into Finance because it was seen as an instant wealth generator or nearly instant you had to work very hard but you made a lot of money there's a big payoff for it that pendulum had to swing back to for the health of the society and I think it's swung back and I don't I don't actually sense that Bankers are more demonized than they deserve to be demonized uh there are good ones and there are bad ones there are ones that serve their Community well and ones that don't I think as again as a regulator it's our job to put in place the capital regulations to constrain the behavior of the ones that aren't doing a good job a little more Contrition would have gone a long way I think right let's take a few more uh uh let's say I'm going to do this side there's a gentleman there and then there's a woman with a scarf Mike's coming tell us who you are and make it short uh Neil Roland mlx news and David great panel next time invite Brad Pit please we did invite Brad Pit and Adam Davidson said the reason to invite Brad Pit was because Brad Pit knew a surprising amount about the financial system and I told Adam the contingent here who wanted Brad Pit was not interested in his financial [Laughter] AC Donald Cohen you advised uh fed chairman Greenspan and banki the unbundling of these uh of the nbs's that was done admirably by the shorts should any Regulators have been doing that or was it correct to seed it to the credit rating agencies that failed to do so okay thank you we me get a couple a woman here and then there's a gentleman sitting next to you and then the woman behind hello my name is Natalia I think we all agree that this film has done a great job explaining a complicated problem in a way that was very accessible to the public and so my challenge is how do we now explain nuanced solutions to the public in an equal way so that it doesn't just become well we should put all everybody in jail and never have any more bailouts thank you why don't you give them to the mic to the gentleman next to you and then there's a woman behind you yeah stand up so they can see you name's Michael um I had the um the pleasure of being on the other side of the desk with you folks I spent 15 years on Wall Street I left and discussed it it didn't sit with me very well in ' 09 but I was uh um on a structure derivative desk we were creating bespoke synthetic CDs we did that um and I think when I read the book it was fascinating because it validated what I had thought had gone on the movie as well but I'm still digesting it I just saw it um but some of the things that this the things that I so the question going forward is what do we do now right in my opinion and some of the things that I think are really important were missed um and those require us to look back at ourselves is a culture which isn't doesn't make for a good movie um and two quick things you hit on it um and then you hit on it as well from the wall Journal one of them is our is our our desire to buy cheap goods from China and sitting on the desk creating those spoke ABS CDX we were selling those to Chinese companies so they could or or or their foreign Central reserves so they could so they could prop up or prop down their dollar they can manage that to give us cheap Goods that was our fault we did that we bought those cheap Goods um and the other thing was um um home ownership like we had this dream that home ownership is some right or privilege and the folks on Wall Street we didn't sell anything that people weren't willing to buy you know they didn't create this wealth and put it in their pocket like someone to mentioned there was always someone on the other side of the trade you know um so I don't I left Wall Street because I didn't like it right it doesn't fit for me but I think it's wrong to paint the broad bushes they're all evil people they're not there were some bad actors thank you does the woman pass it back thank you hello I'm Lisa rice with the National Fair Housing Alliance and my question is for you um for me no Mr M thank you next question for you um but one of the themes in in your movie is you know the sort of concept that it was these few people um who were Insiders on Wall Street um who saw the The Crisis coming and obviously there were many many more people who saw the crisis coming lots of civil rights organizations lots of consumer protection agencies who had been working years before the crisis to stop a lot of the the practices that were contributing to the bubble and um ultimately Clause the Foreclosure crisis and I'm just wondering a if you were aware of those organizations and of those efforts and B if you were aware why you didn't include you know that element in the the movie and what your thoughts were there you want to take that one first well it's it's uh really simple yes I was aware of those efforts but it's it's just really we have two hours so it was it we really focused on these individuals and what I like and what I loved about people like Dany and these characters was that you know they were people involved in Wall Street but there sort of Outsider nature the idea of Dr bu being a guy who didn't watch any TV who didn't participate in our 24-hour sort of culture of America just listen to like Supple Tura and speed metal and read numbers why was he able to see it when we weren't so I I like that question at the center of it but your absolutely right there were other people that saw it and worked hard to try and prevent it and there was a that's a tough question about is there a way to dramatized Nuance solutions to go with your Nuance diagnosis I you know we we really wanted to take the audience to the point of waking up about this being familiar with it one of the big points of the movie was that you shouldn't be intimidated by this strange jargon you should be able to talk about this don't let anyone tell you you're not an expert here's what happened you should be outraged and then the next step comes after that we didn't go as far as Solutions but don't mistake the film banking is essential and necessary it's a major part of modern civilization we don't hate banking we just hate banking when it gets too good at you know setting its own rules and then it runs a muck that's what we're against so um you know a lot of what we talked about with people is like what what can we do we can vote we can speak out we should know that our Representatives how much money they're taking from Banks and we're trying to be proactive in that sense and we're talking about ideas like Capital requirements we've already have some ideas about how to get these ideas across to more mainstream audiences uh so the next part is the solution we just felt like the story had kind of gone dormant and the idea of this movie was to wake it up Don uh did the why didn't the authorities see what the short saw well I think we did as I said I think we did see that there was a bubble but we didn't see was the weaknesses in the financial system and in particular this partly an answer to the CDO CDs thing so maybe we didn't understand those as well as we should have but I think one of the things we did did not understand was we thought the risk was dispersed through the financial system and that yes PR the house prices could fall and people would lose money and that was too bad but that ended up being very concentrated in a few institutions and this question that constantly is raised in the movie and in the book who was on the other side A lot of it was AIG who had to come in for a bailout uh several monoline insurance companies and several large institutions and I think we thought that things were better spread around and and we didn't understand these these very opaque instruments and their opaque interconnections and how everything came back to rest there was a small Nuance that happened in the early 90s there was a gsse bill that was passed in 1992 I believe government sponsored Enterprises correct fny and Freddy and it was about housing affordability and people should own homes and it was a very Pro housing bill which is great except to your mortgage back security question it changed this is a little technical but it changed the risk waiting of mortgage back Securities on banks balance sheets and so what I'm saying to Basel right well no the BOS preos pre this 1992 so you could have mortgages on your balance sheet and you would not be required to keep as much Capital against those mortgages as you would prior to that bill so so that I think helped not contribute to the crisis or what have happened but the measuring the risk at the banks in those levels became a little bit different it became a little bit harder at that point um and then I just you know as Banks were were in 2006 and 2007 given their quarterly earnings and their level three assets level one level two level three which is somewhat subjective they had Hedges on that they thought were Hedges against these level three so is what the FDIC would look at or the OCC would look at they say okay well we take you know take their word for it looks okay it looks like it's balanced and it wasn't stress tested I guess at the time enough so I would just explain that one question you asked before I think it was right I think that I think that another way of saying what you said is that there were people as the questioner said who saw consumers being ripped off uh they didn't get a very friendly airing from Allen Green Spen Federal Reserve but Ned gramlick who was a governor of the Federal Reserve was concerned about this not because he thought it was going to bring down the entire Financial system but they saw that there were some consumers who were not being protected I think the surprise was what what Danny suggested that it was so that that there was such a house of cards built on this assumption that housing prices would fall that that would cause the worst recession in most of our lifetimes the financial crisis that Ben banki describes is worse than the Great Depression itself that really was an extraordinary failure of imagination that we did can I quickly touch on the question that she had about like how do we explain the solutions that are sometimes nuanced I don't think the regulations we describe are actually that complicated the reason that they're controversial is because there are genuine disagreements on whether they actually on net actually do any good and I'll just bring a couple of examples um uh one thing almost everybody agrees I certainly agrees we should have more Capital you know banks are less likely to fail with more Capital um well one of the unintended consequences of that is the FDIC now requires new Banks to have a lot more Capital than they used to as a consequence we have had no new Banks except one created in the last five years so one reason our too big to fail problem is getting worse is because no new banks are being created this is a form of regulatory capture big Banks love the fact that it's very difficult to start a new bank now now you've talked about how big a problem it is in the bond markets now the lack of liquidity is terrible the re one of the important reasons is because Dodd Frank and the B and the BOS rule said hey we learned that we need to have have Banks hold more capital for their bond trading books we are basically the taxpayers subsidizing your hedge fund's ability to access liquidity at these banks that has to stop that's why you can't get the liquidity you used to so you you're obviously on the cost side of the cost benefit test of making Banks hold more Capital so if breaking up the big Banks sounds like an easy solution try and figure out why the democ the Democratic party is tearing itself apart over this same question because there are strong arguments on both sides and can I just mentioned that one bank I happen to be friends with a guy who started it he's an Amish bishop and it's a bank that serves the Amish community in berhad Pennsylvania I just want to mention that so so I think that I'm afraid we're gonna have to end it here because uh Adam and Adam have another engagement uh I want to end where I began that there is no question that Adam McCay has started a conversation I mean it's 7:40 on an and I I personally don't want Adam McKay and Hollywood to come up with Nuance Solutions but I think that it's really important that without a conversation and without dramatizing people getting hurt and bad guys and good guys will never get to the point of having Nuance Solutions so thank you all for coming and thank you to all of you for [Applause] the

Channel: Brookings Institution

Views: 86,117

Keywords: Brookings Institution, The Big Short, Adam McKay, financial crisis, mortgage-backed securities, film, narrative

Id: e83a1ABh2h0

Length: 66min 19sec (3979 seconds)

Published: Thu Jan 28 2016