Big Short

After watching The Big Short, I felt I had a decent grasp on the causes of the 2008 financial crisis. The film, which is being released across the United States today, is based on the book by Michael Lewis, and describes how a few prescient financiers bet against the debt bubble and made millions.

Still, nothing can replace the insight of someone who worked in the industry during the crisis. Bob Henderson, a physics PhD turned Wall Street trader, lost $200 million in a single month in 2008 (before ultimately recovering from the loss and making a profit), while working at a major investment bank in New York. He details his story tomorrow, the 24th, in an exclusive Nautilus feature. (Henderson’s article is now available to read.)

Before we publish his feature, we wanted to get his opinion on The Big Short. What he had to say was illuminating, not only because of how he related with the characters—played by Ryan Gosling, Brad Pitt, Steve Carrell, and others—but also because of the context he gave.

What surprised you the most in the movie’s portrayal of the impending financial collapse?

It was surprising to me that some people, portrayed by Ryan Gosling and Christian Bale and others, actually got to the bottom of some of those mortgage products—figuring out that they were being fundamentally mispriced—when so many others didn’t. We had lots of quants—quantitative experts—and very smart people at the banks who presumably didn’t see it, or somehow it didn’t reach the right people. Alan Greenspan didn’t see it, Ben Bernanke didn’t see it, and neither did the head of the Treasury—super smart people who did have their fingers on the pulse of a million different things. Working at my bank, I talked to some of those high level people towards the end of 2007, when the first real cracks were happening in subprime loans, but it hadn’t spread to everything else yet and the big crisis came a year later. They really thought, Oh it’s just a subprime thing; it’ll be contained. So a big part of the debate about the recession—and this is simplifying a bit—is whether the banks were stupid or criminal in this. I’ll go on the side of stupid, not criminal. The fact that an organization can act stupidly even though it has a bunch of smart people in it, that’s interesting.

Did The Big Short change your perspective on the collapse in any way?

Absolutely. The Big Short helped me understand the incentives of the guys who saw the collapse coming. It also helped me understand—if research bears it out, which I think it probably will—that these products themselves helped inflate the bubble. And not only did the bubble infect these products and make them bad, there was also a feedback loop so that the more these products had sold, the more demand there was for loans, which then drove banks to be more willing to buy these crappy loans, which then meant the mortgage brokers made more crappy loans, which meant more people could buy houses, which pushed the market up more. That whole feedback loop is really systematic and it’s interesting, and I don’t know that anybody at the time could’ve really seen that.