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Finding the real bad guys on Wall Street

If you haven’t seen "The Big Short" yet, see it. The movie is based on Michael Lewis’s 2010 book, “The Big Short,” about a handful of players who foresaw the 2007 housing bubble and subsequent crisis (a topic covered extensively in a slew of courses on campus and likely familiar to a decent portion of the student body here). The great mix of emotional storytelling and meaningful questions makes it one of my favorite movies of the past few years. If this were a work of pure fiction, I’d still love it - and that scares me. The fact that I was so riled up without knowing the factual accuracy is a recipe for misinformation. We have to understand that this is a movie first and an analysis of the financial crisis second. My opinion of the financial crisis already aligned with the narrative of the movie. It’s easy to watch a great story that simply confirms everything you already believe to be true. But that sort of blind acceptance just makes me uncomfortable, so I did a lot of thinking and a little research. In the name of making a good story, the movie makers and Lewis himself had to make heroes and villians arbitrarily.

At its core, it seems to be pretty factually correct, far more so than the vast majority of movies I’ve looked at. However, like any form of entertainment, the problem arises when we try to paint a neat little story around a very complicated issue. As complex as the world is, stories seem to have a pretty simple formulathat works. If you want to make something into a story, you have to mold into this format. That’s just the way human psychology likes it. A classic story needs good guys and bad guys. Yes, I admit that there are lots of stories that don’t do this, and very good ones at that. But this is a tried-and-true method that is found in a great deal of classic stories, and almost all blockbuster movies. This movie is no different.

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Who are the good guys? Well, without spoiling much, Christian Bale and Steve Carell make the list. Irrespective of what they do, they just have some sort of morality that we like, some level of honesty and integrity that we are immediately drawn to. Christian Bale, who portrays Michael Burry, an eccentric, barefoot, metal music loving investor, is my favorite character. Not only is he absolutely brilliant, he's simply a genuine and honest person, and the audience immediately loves him for it. The bad guys on the other hand? Total jerks. Mean, manipulative, incompetent.

Still, even though I loved the honest appeal of Christian Bale’s character, I couldn’t help but question what exactly made him different from the bad guys. The “baddest baddie” of them all has to be Wing Chau, a financial complexity wizard who meets with Steve Carell's character in a dinner scene taken straight from Lewis’s book. It reveals that he and everyone else running the show are monstrous pricks who like to make tons of money and it's about to blow up. The sleaze is just oozing out of this guy the entire scene. In fact everybody who’s bad is an incompetent prick who wants to make money. But, doesn’t Bale’s character love making money? Oh, but he’s just a numbers guy who likes solving puzzles, and just so happens to make money as a consequence, right? Whatever the motivation, his aim is making money. Is the only difference between the good guys and bad guys competency? Of course, even that is highly oversold. I will vastly oversimplify the issue and say that in reality, there is a lot of uncertainty in financial markets, and the losers of a bet are not necessarily less competent or less informed. They’re just unlucky. By the way, Lewis describes Chau, our prototypical villain, as being “a really nice guy.” Here he refers to Steve Eisman, the real person on which Steve Carell’s character, a "good guy", is based. He says that “whatever rising anger Eisman felt was offset by [Chau’s] genial disposition.” Huh.

Which leads me to the premise of the whole movie: the heroes who saw the financial crisis looming and took on the big bad banks by shorting their evil money making machine. But what is a short on the housing bubble, if not more speculation? In one scene, Selena Gomez tries to explain through a poker game how high speculation and compounding bets lead to large busts based on small chance events. Definitely avoid those, got it. Yet, soon after, our heroes are running around Vegas speculating subprime mortgage default rates and making bets against the stability of the housing market.

From Lewis’s mouth directly, here’s an explanation of what Steve Eisman was doing:“But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage.” So, when Eisman realized this, what did he do? Stop betting and run to the papers? No, he just bet more. I don’t think Selena would approve. What gives? Only good guys can speculate? Well, they were right and the bad guys were wrong, duh.

I’m leaving out an important aspect of the third act in which the main characters all simultaneously realize the implications of their shallow, money grubbing game and decide to call it quits after conveniently raking in hundreds of millions of dollars. But that isn’t real. In real life, these people were just regular players that were on the winning side and most of them are still playing the same game today. I’m going to shamelessly borrow a quote from Yves Smith in his review of Lewis’s original book which essentially is a far better portrayal of my argument. “Eisman recognizes that the subprime market is a disaster waiting to happen, a monstrous fire hazard that, once lit, will engulf the housing market and financial firms. Yet he continues to throw Molotov cocktails at it. Eisman is no noble outsider. He is a willing, knowing co-conspirator. Even worse, he and the other shorts Lewis lionizes didn’t simply set off the global debt conflagration, they made the severity of the crisis vastly worse.”

From what I gather about Steve Eisman from both Lewis’s descriptions and the movie’s portrayal, he is a smart, cynical guy who realizes just how screwed up the financial industry is. He himself described the financial collapse as justice. To show the banks just how delinquent they were being, he bet heavily against them. It would be akin to sticking your son's hand into a fire pit to show him that playing with fire is dangerous. Then you collect $100 million dollars for successfully observing his 3rd degree burns.

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Don’t get me wrong, the movie made great points about the unnecessary complexity of large financial institutions, how bond credit rating agencies have conflicting interests with their clients, and how huge speculation led to an unnecessary and avoidable financial crisis. It wraps up the story with some suggestions about reigning in gross speculation and promoting government regulation of the financial industry. That’s all well and good, and I’ve heard similar arguments from major economists (though I'm no economist myself). But to make this point, it had to tell a story, and stories require arbitrary lines to be drawn in the sand between the good guys and the bad guys. Maybe that’s necessary to get people to think about the important issue at hand. Here I am talking about it and thinking about it, so it clearly worked. Hell, it made a damn good movie too, I admit. But it's important to realize, especially at a place like Princeton where many of you will go on to work in finance, that in real life, the good guys and bad guys never stand out like this, if they even exist at all. It just makes me worry about the consequences of arbitrarily lauding a group of players while vilifying another when in reality, they’re all just playing the same game anyway.

ChristianWawrzonek is a computer science major from Pittsburgh, Pa. He can be reached atcjw5@princeton.edu.

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