Michael Grunwald is a senior staff writer for Politico Magazine.

The Big Short, Hollywood’s star-studded effort to explain the financial meltdown of 2008, was nominated this week for the Academy Award for Best Picture. And if there were an Oscar for Best Explanatory Cameo, the pop star Selena Gomez surely would have been nominated for the scene where she sits at a blackjack table and helps demystify a byzantine financial instrument known as a “synthetic CDO.”

Gomez is on a winning streak, so she bets $10 million on her hand—a hand, she explains, that represents a mortgage bond. Then two spectators make an even bigger side bet on her hand. Then two more spectators make an even bigger side bet on that side bet, with heavy odds because Gomez is on such a roll, just as the mortgage market was on a roll before 2008. And then… she busts, just as housing went bust. The dealer wins. Groans all around.


That’s not a bad introduction to the synthetic CDO, the derivative the movie’s narrator describes as the “atomic bomb” that nuked the global economy. Oscar-nominated director Adam McKay deserves credit for trying to make such complex financial concepts accessible. But since many Americans will be inclined to believe The Big Short’s cinematic version of the mortgage crisis, it’s worth noting that its analysis of what actually happened to the American economy—even down to the virtuosic little explainer asides—doesn't really add up.

Take that blackjack scene. Why was everyone groaning? A bet is a two-way deal, so shouldn’t the winners of those side bets be cheering? And anyway, why would a bunch of random side bets among consenting adults nuke the economy? Finally, if the dealer is supposed to represent Wall Street, because the house always wins, why did Lehman Brothers and Bear Stearns and so many other Wall Street behemoths lose so badly that their firms collapsed in 2008?

I know, I know. It’s just a movie. I get why so many critics have given it, as Gomez might say, that same old love. But The Big Short is not necessarily, with more apologies to Gomez, good for you, unless you happen to be Bernie Sanders. Its angry take on the financial crisis is misleading and its furious take on financial reform is wrong. It was instructive to see McKay discuss his views on the collapse and its aftermath in an interview with Vox, because despite his ambitious vision for his film, he clearly didn’t know what he was talking about.

Some conservatives have argued that The Big Short is unfairly brutal to Wall Street and the financial sector. They’re wrong: it is appropriately brutal to Wall Street and the financial sector. The right-wing notion that Big Government created the crisis is absurdly ahistorical. But synthetic CDO’s didn’t create the crisis either, any more than Gomez’s microphone creates hit records. Neither did regular CDO’s, short for collateralized debt obligations, even though celebrity chef Anthony Bourdain deserves consideration for that explanatory Oscar after popping up to compare them to three-day-old seafood stew.



To disclose my crisis bias, I helped former Treasury Secretary Timothy Geithner with his memoir; Michael Lewis, the best-selling author who wrote the book that inspired The Big Short, wrote a lovely review. But as well-acted and well-crafted as the film version may be, it has three basic explanatory problems. It actually overstates the complexity of the crisis. It ultimately misstates the relative importance of stupidity versus fraud in creating the crisis. And it severely understates what has been done to make sure the crisis doesn’t happen again.

Simple vs. Complex: In the first scene of The Big Short, the narrator (played by Ryan Gosling) explains how a trader named Lew Ranieri invented the mortgage-backed security, which packaged together boring low-yield mortgage loans into much cooler high-yield bonds, which later “mutated into a monstrosity that collapsed the global economy.” The Australian bombshell Margot Robbie, yet another Explanatory Cameo contender, then details how Wall Street dumped risky subprime mortgages into those bonds, a lecture she delivers, since bonds are not a naturally sexy topic, while sipping champagne in a bubble bath.

The underlying message is that you need to understand all these complex financial instruments to understand the financial meltdown of 2008. Really, though, you don’t. Those instruments were just fancy ways for financial players to place bets on the housing market. They were instruments. Financial crises had been erupting periodically for centuries before the invention of complicated derivatives; you can’t blame the Dutch tulip craze on synthetic CDO’s. One of the movie’s main complaints with Wall Street is that it “makes the simple look complex,” but that’s one of my main complaints with the movie.

What actually collapsed the global economy? As with the tulips and most financial crises, the basic cause was a highly leveraged investment mania—in this, case, a widely shared delusion that the U.S. housing market was immune to crashes, a delusion The Big Short portrays with great wit. (America was basically that Florida realtor who kept insisting that the start of the crash was “just a gully.”) When this kind of delusion isn’t financed with borrowed capital, it doesn’t cause systemic problems; investors who got caught up in the dot-com craze simply lost their money when the Pets.coms of the world went bust. But when the delusion is financed by debt, especially short-term debt that frightened lenders can withdraw in a hurry when markets turn, it can explode into a death spiral of margin calls and panic selling followed by more margin calls and panic selling.

That’s what happened in the housing bubble, as investors and institutions around the world took advantage of easy credit—fueled by low interest rates and what Ben Bernanke has described as a “global savings glut”—to make highly leveraged bets on various mortgage products that seemed perfectly safe, because a nationwide epidemic of mortgage defaults seemed practically impossible. The complexity of the products they invested in didn’t matter that much once the epidemic arrived. The basic problem was simple: a mania financed by risky leverage. The problem was exacerbated by the fact that so much of the leverage was in the form of overnight financing that could run in an instant, and that so much of the risk had migrated to virtually unregulated “shadow banks” rather than commercial banks with deposits. But what got those institutions into trouble was poorly hedged housing bets that weren’t as safe as they thought, not the complex forms those bets happened to take.

Stupid vs. Evil: The Big Short opens with an epigraph from Mark Twain: “It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so.” The implication is that the crisis was caused by cluelessness, not malice. That implication, which happens to be correct, is reinforced in a later scene, when a hedge fund manager played by Steve Carell explains to a stripper that she won’t necessarily be able to refinance her five (!) mortgages before the rates explode, even though her broker had told her everything would be fine. “He’s a liar,” Carell says, before reconsidering. “Well, in this case, he’s wrong.” In other words, the guy was a sleaze for letting her finance five homes, but he probably truly believed that home prices would keep rising fast enough to help her avoid any problems.

He probably did. The story of the bubble was a story of unethical as well as unintelligent behavior, and there wasn’t always a clear demarcation between fraud and idiocy. “Tell me the difference between stupid and illegal,” Gosling’s character says, “and I’ll have my wife’s brother arrested.” But the story of the crisis is mostly a story about dumb self-defeating mistakes. Yes, Wall Street runs on greed, and yes, big banks ripped off their clients, but ultimately, Wall Street succumbed to the housing-is-bulletproof delusion, and many of those big banks lost their shirts in the panic. The movie is at its best when it chronicles how the smart guys who shorted mortgage bonds beat the “dumb money” that assumed the housing market would remain relatively stable indefinitely. The big banks were dumb money. Just about everyone was, which is why a tiny group of obscure pessimists got their own movie. A post-crisis study has found that the securitized finance guys whose paper-pushing helped inflate the bubble—the dopes whose fatuous arrogance appalled the shorts at a climactic scene at a Las Vegas conference—had invested their own personal wealth in, you guessed it, housing.

But by the end of the film, The Big Short flips from blaming stupidity to blaming evil. McKay wants to portray the crisis as the inevitable result of an “era of fraud,” not only in finance but in politics, factory-farmed food and even steroid-infested baseball. Carell delivers the key soliloquy, declaring that Wall Street always knew it could make reckless bets because the government would make sure it wouldn’t suffer. “They knew taxpayers would bail them out,” he says. “They’re fucking crooks.”

This notion that financial giants felt no pain during the crisis is silly. Lehman imploded. Fannie Mae and Freddie Mac were taken over by the government. Bear, Merrill Lynch, Washington Mutual and Wachovia collapsed into the arms of competitors. Their CEO’s all lost their jobs. Their investors all absorbed extraordinary losses. AIG’s financial wizards never expected a massive bailout when they decided to insure mortgage bonds; the Fed had never even contemplated assistance for an insurer. They insured the bonds because they genuinely believed there was virtually no chance they would ever have to pay out.

The fact that no Wall Street executives went to jail for their role in the crisis, despite a glut of politically ambitious prosecutors who would have loved to frog-march bankers into court in handcuffs, ought to suggest that their activities, however idiotic and irresponsible, were not provably illegal. Instead, The Big Short concludes from that fact that the system is rigged and that nothing has changed.

Change vs. Status Quo: The ultimate takeaway of The Big Short is that the status quo has prevailed. “The big banks lobbied Congress to kill big reform,” Gosling says. “Eight million Americans lost their jobs. Six million lost their homes.”

Well, 14 million Americans have gotten new jobs since 2010. The housing market has recovered. And the big banks utterly failed to kill big reform. Thanks to the Dodd-Frank legislation that President Obama signed into law, as well as the international Basel III rules that are still taking effect, the big banks now have more than twice as much loss-absorbing capital than they had before the crisis. Their leverage has shrunk dramatically, and much less of their borrowing is short-term. Dodd-Frank also included a new Consumer Financial Protection Bureau that is cracking down on ripoffs in the banking sector, the mortgage market, and throughout the economy.

McKay told Vox that today, the “too-big-to-fail” problem is “actually worse in some ways,” but that’s not true. It's actually better in every way. Thanks to tighter regulations and capital requirements for bigger banks, along with a slew of other new rules designed to help government officials wind them down safely if they get into trouble, the so-called “too-big-to-fail subsidy” has virtually disappeared; the big banks can no longer access cheaper financing than their smaller rivals because markets no longer believe they’ll be bailed out in a crisis. Dodd-Frank did not formally break up big banks, but some of the biggest are already breaking themselves up voluntarily to avoid some of the stringent new rules. McKay also said it’s “jaw-dropping” that “we didn’t even attempt to get into a discussion about a derivatives clearinghouse” to make sure CDO’s and their ilk are transparent. But what’s jaw-dropping is his ignorance about the Dodd-Frank, which has not only required most derivatives to be cleared, but has required collateral to be posted for most derivatives trades, dramatically reducing the danger of overleveraged bets.

The Big Short is designed to make people angry. Maybe it wouldn’t have succeeded as a work of art if it had ended with responsible government crisis managers making horribly unpopular decisions that stabilized the financial system and prevented a second Great Depression. But that’s what happened, and people ought to know that. Taxpayers didn’t get shafted; the bailouts ended up turning a profit for the government. The financial system is not perfectly safe, and never will be, but it is dramatically safer. Many of the big banks are still big, but bigness was not what caused the crisis, and the Sanders proposal to take a hatchet to big banks, while emotionally satisfying, would be bad public policy.

McKay is entitled to his own opinion, and in Hollywood, he’s even entitled to his own facts. What’s galling is his pose as an even-handed truth-teller who just wants to jump-start a stalled conversation about financial reform, a conversation that never ended for some of us . “We stopped the conversation!” he told Vox. “Maybe that’s because of our crazy news cycle. I think most people to this day still don’t really know fully what happened.”

He’s one of those people. If people really knew what happened, they might feel a bit better about where we are today.