The Big Short and Understanding Finance

My 2 flat in Rogers Park, Chicago’s 49th ward.

It’s Christmas Eve, 2015, and I went  to see “The Big Short.”  Although the movie was not well reviewed (Michael Phillips of the Chicago Tribune said that  financial markets were too complicated for the average person to understand. Hence, this movie was boring), I found it well scripted, edited, and acted.

Perhaps  it is because I, also, could see how over heated the real estate market was…and I will tell you  how.

In the mid 1980s, seeing that I would never get rich by grooming dogs, no matter how well I  managed my budget, I decided to learn about the mortgage market and selling commercial paper.  That’s right.  I learned that not just banks, but private investors bought mortgages and you really didn’t need years of college education to sell mortgages.  You just had to know the concepts of present value of future cash flow, loan to value—and the formula to  figure out what a cash flow was worth.  That was it.  Simple as that.  Yes, you need a special calculator to  figure this stuff out, but you can easily learn the formula in a few minutes.

I  learned, via audio tapes, that  brokers sliced up payment streams, and sold portions of mortgages.  You didn’t have to buy 240 payments (a 20 year mortgage), but could by payment 12, 18, 32…whatever.  How would you manage to get paid if the mortgage was sold or the mortgagee defaulted?  Ah, there was the rub.

I wondered how this could be legal.  Well, it was legal because it was not ILLEGAL, and frankly, most people who buy bundles don’t look that closely at what they are buying.  I mean, they don’t look at the value of the property the mortgage is on, trusting appraisers.  They don’t look at the credit histories of the borrowers.  The assumption was that someone was  checking out this stuff…but in reality, nobody was. It just seemed to risky for me.  The only way you could  make money was if you were  a lawyer, and even then, it was an iffy investment.

My niece learned the  mortgage business (and was a lawyer), and I called her about a mortgage because I wanted to lower my payments.  She got me a ‘no document’ mortgage, meaning I didn’t have to prove income.  At the time, I was earning under $30,000 a year, but my credit was good, and my  ‘loan to value’ on the house was very good, so it wasn’t a problem.  After a few years, I thought I could do better, and wanted to retire a line of credit which was never very transparent, and I could never get a statement  on how much principle I owed, so I , again, refinanced with a broker who got me  a mortgage based on the LIBOR (London Interbank Offered Rate—a rather bogus index used in the USA), which was  at 3%, but adjustable. The broker told me  the rate was very stable, and rarely fluctuated more than .25, but that turned out  not to be so, and within  six months the rate climbed from 3% to 5%, and I again refinanced.

I just love HGTV, and I loved the shows about house flipping and people house hunting.  What I was seeing, on those shows, was people were being approved for  mortgages with no or hardly any (2%?) money down, based on their incomes, not expenses, and clearly people were buying much more  home than they could afford.  But it was legal.

I was seeing this with some friends as well. I thought that this could not possibly go on.  People were trusting banks, were carrying too much debt on credit cards, and all that needed to happen was for energy prices to go up or people losing jobs for whatever reason, or becoming over extended (a good one was  investors buying a bunch of property, not keeping the property up, getting rent payments but not paying the mortgages on time because  that’s how  some people manage their finances).

This movie shows that—all of that—really well…and virtually all the practices that led up to this are still legal.   Our Chicago area schools are not really teaching finance, or compound interest, or budgeting…especially not in low-income areas…and we still have people thinking this is  just not an interesting subject.  These are the same people who don’t bother to  check out the political candidates positions online (easy enough to do, but they go for the bloviators), and don’t vote, anyways.  Then, they complain.

I had read excerpts of Michael Lewis’ book, and learned about Michael Burry (excellently portrayed by  Christian Bale).  This movie should be shown  to every highs school student.

Tags: America, annnoying things, Asperger's Syndrome, humor, integrity, optimism, Robyn Michaels, scams