The Big Short Slays The "Big Lie"

I saw "The Big Short" the other day, along with my wife- who was singularly uninterested, what without even a cameo by Hugh Grant-but it is a movie people must see, even though they might find the subject matter a bit dry. This is wonky stuff, but using Anthony Bourdain to explain CDOs was a clever ruse, as was the appearance of the dean of Behavioral Science, Richard Thaler, with Selena Gomez as his sidekick, to demonstrate the role of investor expectations, and how investments can multiply from one single investment.

It's been quite a year for Professor Thaler, as he has finally brought his own discipline to the fore of economic thinking. Behavioral Economics has now gone mainstream. But that's another story, although the producers deserve credit for bringing him further into the public's view.

For the investment community, this movie is the stuff of gauzy reminiscence: “The Way We Were” and “The Big Sleep” rolled into one. No one who lived through those days will ever forget them, so the film had a special place with market players from institutions to the retail side alike. I have to say being reminded of it was not particularly pleasant. Those were hard times, and I'm grateful I had the resources to survive it. Many others were not so fortunate.

Having read the book by Michael Lewis years ago in the aftermath of the crisis, I was surprised it eventually found it's way on to the screen, but I'm happy it did, for an important reason: There is one important aspect of the movie that at long last, sets the record straight. For quite some time, there has been a concerted campaign to blame the housing crisis on government policy. This is utterly false, and the roots of this lie in some if deeply held, even hateful prejudices, not facts or reason.

The scope of this calumny has spread so far, it has earned the title of “The Big Lie,” recalling the Nazis' cynical technique that if a falsehood was told often enough, the majority of people would come to believe it. So it has come to pass with the housing crisis. The first line of attack was that it was the Community Reinvestment Act that got the ball rolling on “lowered underwriting standards.” There are several problems with this theory: the use of CRA wasn't all that widespread to begin with, and secondly, these were fully documented mortgages. Full income, asset and credit checks were needed to underwrite them. Lastly, the proof was in the pudding: despite the massive meltdown in housing values, CRA loans turned out to be some of the best performing asset classes out there, experiencing low default rates. That's even with 8 million people tossed out of work.

The second part of this narrative is that Fannie and Freddie were to blame. This too, strains credulity in light of the evidence and the outcomes. As Josh Rosner, a well known Fannie critic wrote "All one needs to do is look at the delinquency and default levels of agency loans versus the overall market and you will see that by the end of 2009, Fannie's seriously delinquent loans were 3%, Freddie's were 2.3%, whole subprime ARMS were 34%, and overall was 23%."

That's pretty good underwriting quality considering the scope of the economic disaster that we went through. So, how DID the “Big Lie” spread so far to the point where millions of Americans believe it without question? Blame the broken “journalism” that's helped create our broken politics. There appear to be no truths in reportage today, only confirmation of narratives. And people like to have their prejudices confirmed, even in the face of empirical evidence.

Hopefully, "The Big Short" will finally explain (to those with open minds, anyway) perhaps the ugliest truth about the crisis: that when the economy was tossed into chaos, and the lives of millions were ruined, some actors didn't place the blame on the hedge funds, nor on the mortgage banks, nor on the securitizers, nor the enabling rating agencies, but a relatively obscure program designed to prevent the poor from being discriminated against.

That is an ugly indictment against our politics and our culture.

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FloMartin Securities, Inc.

Donald R. Davret, Investment Advisor Representative

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