HBO premieres Too Big To Fail, based on Andrew Ross Sorkin’s book of the same name about the 2008 financial crisis, on Monday night. Directed by Curtis Hanson (L.A. Confidential, 8 Mile) and starring Paul Giamatti as Ben Bernanke, the movie version of Too Big To Fail will presumably deliver what critics praised the book for doing — putting “the reader in the room for some of the biggest-dollar conference calls in history” and “skillfully captur[ing] the raucous enthusiasm and riotous greed that fueled this rational irrationality.”
Sorkin’s book is a riveting (and exhaustive) account of the power players, both on Wall Street and in the government, who took center stage during the climax of the crisis. Think Bob Woodward on Wall Street. What it does not do is explain why we arrived at this particular moment in our financial history. Too Big To Fail is great entertainment, but it is not an education. We recommend two other sources for that.
Being English majors, we have a difficult time grasping our checkbook, much less derivatives, subprime mortgages, collateralized debt obligations and credit default swaps. What’s clear from Michael Lewis’s The Big Short is that even the experts didn’t know what these things were.
For example, a Morgan Stanley bond trader named Howie Hubler convinced his bosses in 2006 to let him manage his own proprietary trading group within the company and use his talents making, instead of millions, billions. Hubler and his elite team of traders moved from the second floor of the Morgan Stanley offices up to the tenth floor. Those eight floors in between were, at least theoretically, supposed to prevent a conflict of interest: The traders on the second floor were dealing directly with customers — for example, selling them subprime loans — while Hubler’s team on the tenth floor was betting against those customers and their ability to pay those very same loans. (The less polite way to put it would be that Hubler and his team were betting for their customer’s stupidity.)
Hubler’s team began betting against subprime mortgages in September 2006. By January 2007, he had sold credit default swaps (bear with us) worth a total of sixteen billion dollars. Hubler was right to bet against subprime mortgages, but he did it the wrong way. As Lewis puts it, “Hubler and his traders thought they were smart guys put on earth to exploit the market’s stupid inefficiencies. Instead, they simply contributed more inefficiency.” Hubler’s bet lost Morgan Stanley nine billion dollars — “the single largest loss in the history of Wall Street.”
How could Morgan Stanley have exposed itself to such loss? The answer is simple: It had no idea what Hubler was doing. Morgan Stanley’s CEO John Mack held a conference call for investors to explain, writes Lewis, “how a trading loss of $9.2 billion — give or take a few billion — had more than overwhelmed the profits generated by its fifty thousand or so employees.” Mack said he wanted “to be absolutely clear” that as CEO “I take responsibility for performance.” He then took questions. Lewis quotes a painfully brutal exchange between Mack and investors, during which Mack said this:
Bill, look, let’s be clear. One, this trade was recognized and entered into our accounts. Two, it was entered into our risk management system. It’s very simple. When these got, it’s simple, it’s very painful, so I’m not being glib. When these guys stress loss the scenario on putting on this position, they did not envision … that we could have this degree of default, right. It’s fair to say that our risk management division did not stress those losses as well. It’s just simple as that.
Here is where Lewis, the author of Liar’s Poker and The Blind Side, proves an especially able guide. In response to this comment, he writes, “It’s too much to expect people who run big Wall Street firms to speak plain English, since so much of their livelihood depends on people believing what they do cannot be translated into plain English.” He adds, “What John Mack’s trying to say, without coming right out and saying that no one else at Morgan Stanley had a clue what risks Howie Hubler was running, is that no one else at Morgan Stanley had a clue what risks Howie Hubler was running — and neither did Howie Hubler.”
This delicious passage is, incidentally, a footnote. Other authors would kill to have this in regular size font.
Lewis sneaks his way into narratives through the oddballs and castoffs. In Moneyball he made the Oakland A’s general manager Billy Beane his protagonist, looking at baseball through the lens of statistical analysis and unorthodox recruiting. In The Big Short he compiles a cast of financial misfits who saw the direction the market was going in as early as 2002 and bet against it. Unlike Hubler, these guys actually made money. None of them worked or thrived within the culture of Wall Street. They talk and curse and practically write the book for Lewis, giving a colorful running commentary of the events leading up to the meltdown. They emerge as strange anti-heroes: rich off their bets, vindicated yet conflicted at being proven right, and genuinely afraid of the “doomsday machine” that was the subprime disaster.
Lewis’s book, while entertaining and informative, is too character-specific to provide a truly comprehensive picture of the financial crisis. For that, we recommend Inside Job, this year’s winner for Best Documentary and a sobering, at times infuriating film. (In other words, not a good date night movie.)
Inside Job combines interviews with informational charts and graphs to cast a wide angle lens on the financial crisis, starting with the conditions that precipitated it. Director Charles Ferguson draws a direct line from a homeowner signing a piece of paper with an adjustable-rate mortgage in 2005 to Lehman Brothers filing for bankruptcy in September 2008. He marshals an enormous amount of complex information and distills it into some eye-opening graphics — or captures it with just the right quote, as when Andrew Sheng, speaking of financial money-making instruments, says, “Why should a financial engineer be paid four times to 100 times more than a real engineer? A real engineer build bridges. A financial engineer build dreams. And, you know, when those dreams turn out to be nightmares, other people pay for it.”
There’s plenty of anger in Inside Job, but Ferguson channels it for the viewer. While he was unable to get Alan Greenspan, Ben Bernanke or Henry Paulson on camera, he somehow convinces a number of academics — Frederic Mishkin and Glenn Hubbard of Columbia Business School, Martin Feldstein and John Campbell of Harvard — to sit down with him. Clearly none of these gentlemen knew what they were in for. Ferguson, interviewing behind the camera, calmly and thoroughly nails them to the wall for lending academic credibility to dubious financial behavior, often for personal profit. The pernicious affair between Wall Street and academia, often glossed over if not ignored in other narratives about the crisis, gets full attention here.
The CEOs do speak for themselves, during congressional hearings, and we are treated to a few congressmen, notably Carl Levin, badgering them with the same persistence and smarts that Ferguson shows. What’s clear from Inside Job is that money rules our political system, and that the rich and powerful are not merely influential in Washington — they are running the show. Inside Job is not a partisan film, but it’s certainly a political one. You will feel, after watching it, a healthy dose of cynicism and outrage. The Big Short is more entertaining, but Inside Job makes you feel the weight of what went wrong, and question what if anything has changed since that would prevent it from happening again.