“It ain’t what you don’t know that gets you in trouble, it’s what you know that isn’t so.” – Mark Twain, but also a bunch of other humorists.
Incredibly apt opening for the movie. I feel the need to step up my own game <digs deep>: Those who dance are considered insane by those who cannot hear the music.
To “short sell” in trading is to sell something you don’t yet own. Roughly, it’s a means of financing, like leverage, or borrowing money in order to invest for a bigger return than you could otherwise get, and it allows you to take on a much bigger position.
You are betting that when you have to pay up your debt – “cover the short,” ie actually buy the thing you’ve sold before you owned it in order to make good on the sale, it’ll now be much cheaper. Instead of Buy Low Sell High, this is Sell High First, And Sell Much More Than You Have Money In Your Pocket To Buy, Buy Low Later (Hopefully!) It’s considered riskier (d-uh) and only for “sophisticated” investors, governed by various restrictions put in place to rein in the trigger-happy cowboys. You “short” when you believe something is priced too high, it’s where the phrase “don’t sell yourself short” comes from.
A few people (financial journalist Michael Lewis estimates about 20) profited from betting against the US housing market, by seeing what no one else did. OR rather, what no one else could believe they were seeing. 20 people, out of the hundreds of thousands who didn’t see it. What was different about those 20 people?
I have a constant fascination with mispricing or rather, differences in opinion, of what something should cost. It’s in practically everything. No, don’t just think stocks, bonds, derivatives of. Think What Those Companies Produce – movies, clothing, toothpaste…. bottled water? Clean air? Like in HN’s one-time favourite movie, The Lorax – how clean air is sold by the people who keep pollution high.
So a prevailing theme is People Creating The Need/Problem So They Can Sell The Fix. (Bonus Question: Which superhero movie out now has a similar storyline?) It’s easy to be the Hero with a Fix when the problem was one you created in the first place.. (Mind. Blown.)
So anyway. The price of something, how valuable something is, how risky something is, the value and risk we place on something, is irrevocably tied to our personalities – and we all know what head cases we can be 🙂
I’ve said flippantly (from over a decade spread out in 7 bank dealing rooms, thanks to 3 mergers – 2 of ’em hostile, 5 reporting line changes in 3 years during the one that was not hostile) that lotsa dealing room professionals would’ve been “flagged” for things like ADHD, OCD, etc etc during their Early Learning Years, had they been evaluated by today’s benchmarks. Now go watch the main characters in Big Short 😀
Ryan Gosling, playing Mr D’you-Smell-The-Mon-ey investment bank Salesperson Extraordinaire Jared Vennett, appears to be the most “normal” (if arrogant and unapologetically self-serving). ONE sales guy, out of the thousands and thousands out there, who saw the market about to tank and created his own commissions opportunity (not… fake problem to fake-fix). He also offloaded enough risk from his bank employer’s books so he could hold the rest of his client trade positions long enough for the market to turn in his clients’ favour, legitimately. “Yes, I’m going to make an obscene amount of money from selling you this, but you won’t care because you’re going to make a huge amount of money too.” But no one would call him a hero. With a fix.
Make way, Jimmy, dis da REAL Bond Man: Jared Vennet (Greg Lippmann in real life) with his Jenga Blocks sales pitch. This the scene where a wrong number has led to Vennet (who works at Deutsche Bank) meeting this little hedge fund. Vennett knows he’s about to present a highly unpopular sales pitch. He’s also coming in having faced ridicule and contempt for his idea. Clock also the Asian Maths Specialist Who “Doesn’t Speak English”. (Seriously, even if Vennett’s Jenga preso bores you, stick around for the 2 mins 45 seconds mark in the video below when he trots out the Asian Person 😀 )
(I just think no one may be aiming for second place, BUT Second in Maths Competition With Interpersonal Skill Enough To Make That Meeting- Sell That Trade m-ight be worth more in life and salaries IF First in Maths is barely human anymore 😛 Also, of course the Chinese dude has a right to be offended at the racism….. but why not just use it to his advantage to close the deal haha)
As for the hardcore traders, they’re mostly nerds with various tics – Brad Pitt’s character in the movie is germ freaky and obsessive-compulsive, 2 hedgies have had devastating life tragedies they never talk about, 1 other hedgie is Special Needs AND lost an eye to cancer during his childhood… And then there are the 2 youth very patiently trading out of their dad’s basement, having grown the USD 110,000 startup money their dad gave them into USD 12 mio via the very humble strategy of buying cheap* options – losing very little at a time if they are wrong, but making much, much more, on the very few times they are right… It’s a similar frame of mind that helps them identify and short the housing market as featured in the movie; they then turned ~USD 15 mio into ~USD 120 mio – BUT they almost never even made it into the market in the first place, because they were so green and didn’t know what documentation needed to be in place to access the market.)
*”Cheap” because at time of purchase the market gave those conditions very low probability of occurring. (Mispricing!!) As more and more participants believe those conditions might happen, the options increase in value. So a general rule in financial derivatives is if you always go with what the majority believes (probability of what you are betting on occurring being the driving factor in pricing), your trade will always be “expensive,” not “cheap”. (Not… that some people don’t choose “expensive” anyway – but at least you need to know it’s expensive, and WHY you are choosing it.)
While The Big Short is based on true life, most characters requested some discretion – the only character using his real name is the “eccentric” fund manager Michael Burry – who has said openly he likely had a mild form of Asperger’s which was not diagnosed in his own childhood, a realisation he came upon after his own son has now been diagnosed with the same…
I’ve been told that people with Asperger’s “lack empathy” – Christian Bale, despite also playing Batman, of all things, is known for being a very dedicated method actor** – in this movie he plays Burry with absolute perfection, including the scenes showing him having the stomach to sit and wait through the terrifying calm before the market tanks exactly like he predicted expected, while holding a massive, massive short position. (Just… barely. Producer Adam McKay says Burry still developed stomach problems from the position.)
AND – get this – with his boss and investors screaming at him about the position, Dr Burry locks in investor funds so they can’t take their money out before he is proven right.
If you didn’t have Asperger’s and your fund manager did this with huge amounts of your money, you would go batsh*t.
**Bale has been known to put so much dedication and research into his roles that when playing former US Vice President Dick Cheney, well-known for his heart problems, his knowledge of heart attack symptoms in discussion while filming saved his director’s life.
Now, another (vaguely entertaining) think – how many (albeit undiagnosed) OCD, ADHD, etc etc grownup professionals are likely to end up in say, the education field? As opposed to those who make a living in say, trading? How many educators would make “good” traders? Would we want them to? If we looked at everyone through the same eyes though, we might fail to see some value, we might miss … opportunity. And that’s an awful waste.
The real Dr Burry has said in interviews that he felt no fear taking on the massive sell-short position, despite usually not trading in that way at all, because in that instant he was absolutely certain.
The fund Burry was managing made ~USD 725 mio from the trades featured in the movie (Burry’s own share being USD 100 mio). Within about a year ~USD 730 mio had been withdrawn from the fund. No one was happy. Dr Burry calmly says, “There were people who made tens of millions off this (trade) and were still pretty upset.”
How many Michael Burrys would’ve thrived in the education field? With little kids. Would we want them to? If we looked at everyone through the same eyes, we might fail to see some value, we might miss … opportunity. And – why yes, that’s an awful waste. 🙂
Most sophisticated investors weren’t looking carefully enough at what they were buying. How could they, you say? Because what they were buying was thousands and thousands of home loans that had been repackaged. Because “WHO reads thousands and thousands of loan terms and conditions?” Because “WHO doesn’t pay their home loan/mortgage?” Because no matter how smart we get with the things we make, the wonderful AND terrible truth is, the man behind the curtain is still we are still human.
As for the non-sophisticated investors – people ended up not having only one mortgage. Because the terms of the loans were either not explained clearly, or else misrepresented altogether. Some people had five mortgages. Y’know, that thing about borrowing in order to magnify your investment position – magnify the risk, magnify the return…
The late great Anthony Bourdain uses Fish Stew Analogy (yes I know this scene is also at the end of the Jared Vennett Salespitch video) to explain “asset repackaging:”
“No Fish Toe!” (Private joke ;D )
Most people didn’t check how old that fish was, they assumed when it went into the stew it was good enough. However Dr Burry’s first request of his fresh new hire with the shiny impressive Business School degree is to pull information on the thousands of mortgage loans that are dumped into the asset repackaging cookpot. This is met with raised eyebrows from both subordinates and superiors, because “No one reads them.” (Indeed, you would see in the movie that even to pull the information garners raised eyebrows from his freshie hire – and freshie hire is not even the one reading it, Dr Burry intended to read the loan terms himself.)
See, instead of glitzy parties, or car shopping (both of which he can more than afford), Dr Burry wants to read what others find “unreadable”. I. Know. Why would anyone prefer to read thousands of loan contracts over fighting to be the It Guy or Girl at a party? Because we are all different. Shouldn’t that just be awesome??
If you are someone who likes staying in, earphones blasting music only you can understand, to read thousands of loan contracts, aren’t you grateful for the fruitcakes who like to party so you don’t have to? 😀
This is how Burry discovers what two year olds know instinctively – that fish don’t have toes (except maybe in highly polluted areas). That you can’t “un-rotten” something by putting it in a pot (though you can legitimately create a great stew out of fairly good fish that is simply not sushi-grade). It’s not rocket science, it’s common sense, that fish don’t have toes. That people with shaky financial situations simply should not take out mortgages for 5 homes. (It’s NOT “free money”!!) It wasn’t the recipe. It was what everyone did with the recipe.
I used to describe the first Asset Backed Commercial Paper (similar to CDO) structure I was involved in as a freshie grad as “Art”. I still think so, and none of those structures blew up. They were handled by people who knew to practice restraint – when there was no fish available, they waited to make the stew. And those structures are still around today. It is not the structure itself that blows things up. (This the one thing I think the movie should’ve made a little clearer – but then the movie is about the structures containing US Housing Market loans.)
I have memories of former bosses who used to complain that they didn’t have enough proverbial fish to make stew with and couldn’t accept more investors’ money into the structure. (No they were not happy turning down investors’ money – who would be??) But no, they didn’t start putting starfish and sea snakes in it just to make up the stew 😀 I just never realised how significant it was, seeing them do that. Now I think it’s important to observe there are people out there who practice restraint when that is what is needed.
Then there was the former boss who advocated psyche evaluations for his RMs and had few other rules, just 2 big ones – 1) do some thing, (not too difficult because many “RMs” were semi-retired investment bank traders or self-made wealthy investors, who traded their own portfolios or those of their friends – that place was like an amalgamation of home offices where everyone shared floor space and opinions about everything from the markets to food to tv series and 2) no compliance/ regulatory issues ever. (So, obviously no crazy fish stews 😀 )
You got fired if you broke either of those two rules. Other than that RMs were flopping about in Juicys and house slippers with their in-case-of-meeting power suits and killer shoes stored neatly in their cubicles… which often also sported DVD players and massage chairs. It was about self regulation.
The place no longer exists today, bought by an aggressive investment bank in one of the most well-known failed takeovers ever. Huh. Bet they hadn’t had their psyche evaluations. <eyeroll>
Shoulda just left us alone, we’d all probably still be there. Getting screamed at by Compliance (well, it’s almost part of their job description, we go too long without them saying anything we start to wonder if they are zzzz 😀 ), screaming inane songs on the violently rocking ferry out for fresh seafood.. though that last was… mostly our Taiwan team. Our Taiwan team were wild, loud, and proud of it – their craggy boss once fake strip danced at the company dinner while his subordinates threw money at him – that was actually my final round “interview”. Not surprising I guess, they wanted to see if I could “fit in”. Over a decade ago. 20-something me, eager to get a job – I guess I could throw money at a 50-something fully dressed Asian male to fit in, get a job…
End tangent. And post.
ps: Go back and look at that last again. Senior male boss in banking & finance industry – Asian, late 50s, mocking the banker stereotype on the dance floor, his “Sweet Young Thing” pretty female assistants slipping him folded dollar bills.
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