Summary of 2008 Global Financial Crisis: The Big Short and Inside Job

Both movies tell story about 2008 Global Financial Crisis, but from different perspective. Inside Job took a helicopter view of how the crisis developed while Big Short saw the crisis from the perspective of people who benefitted from the collapse of MBS. Since 1980, financial industry has been experiencing period of deregulation that caused savings and loan crisis in 1987, Internet stock bubble in 2000, and the recent 2008 GFC. Derivatives and securitization have been very popular and able to avoid strict regulation due to the strong opposition of stricter regulation by important people and financial institution in the sector.

 

The environment of low interest rate and availability of cheap credit have caused many unqualified people to take house mortgage with Adjustable Rate Mortgage (ARM). House price soared, allowing borrower to take a bigger amount of loan due to higher collateral value. When Federal Reserve started to tighten the monetary policy, these homeowners are having difficulties in repaying their monthly payment, causing default and foreclosure nationally. As a result, house price falls nationally, below the amount of loan outstanding. Instead of having the intention to repay their loan, homeowners decided to default and let banks to take their house. In the big short, it was dramatized by a stripper who was having a loan of three houses without understanding the risk involved.

 

The lax standard in giving loans exacerbated nationally because of moral hazard involved in the process, loan originator only goal is to create as many loan as possible to sell it to banks, while banks goal is to securitize as many loan possible to sell it to investors. Credit rating agencies also care only to give high rating so that banks would use their service again. MBS with AAA rating was actually not the same with bonds with AAA rating, as the underlying asset of MBS proves to be junk. It was when investor realized the condition that they panic and sell their MBS in an illiquid market, pushing the price down and triggering a fire sale.

 

On the other side of the fence, there are people who profited from the housing price collapse by buying Credit Default Swap (CDS), an instrument that has pay scheme similar to put options with house price as the underlying instrument. The story of Big Short tells the point of view of an asset manager and young traders that are frustrated when their expectation of falling house price comes true but their CDS didn’t go up in value. Later, they learn that banks have colluded with rating agencies to maintain the rating until they have unloaded their portion.

 

The movie “Big Short’ stops at that point in time, but “Inside Job” continue the story to the collapse of Bear Stearns and Lehman Brother, conservatorship of Fannie Mae and Freddie Mac, and AIG bailout by the government. President Bush signed the Troubled Asset Relief Program (TARP) proposed by Federal Reserve to provide liquidity in the market. The market continues to tumbles and unemployment rise to above 10% rate. At the end, executives of top financial institution still got huge amount of bonus even though their firm are firing employees and had to repay loan to Federal Reserve. Post-2008 regulation is still weak despite government effort to put stricter regulation on executive’s compensation, OTC market, and securitization.

 

The movies are interrelated and told the same story, but from different perspective. Inside Job is more comprehensive in documentation while Big Short is more enjoyable to mass audience. Big Short is a dramatization of the event up to the crisis, while Inside Job investigates what happened after the crisis as well. My critics are that both movies didn’t cover the point of view from regulators (Fed, FDIC, OCC, SEC) and doesn’t acknowledge the benefit of proper securitization.

Published by Journeyman

A global macro analyst with over four years experience in the financial market, the author began his career as an equity analyst before transitioning to macro research focusing on Emerging Markets at a well-known independent research firm. He read voraciously, spending most of his free time following The Economist magazine and reading topics on finance and self-improvement. When off duty, he works part-time for Getty Images, taking pictures from all over the globe. To date, he has over 1200 pictures over 35 countries being sold through the company.

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