The big deal about the writer behind ‘The Big Short’

The technique of sculpting fact to read like fiction was developed about 50 years ago by pioneers like Truman Capote. His In Cold Blood (published 1966) took a set of real murders in rural Kansas and turned them into a hard-boiled detective story.

Writers of “faction” use a range of techniques to move beyond reportage and flesh out real-life incidents. They describe things from the point of view of sundry characters. They outline thoughts. They introduce details about weather, milieu and setting to generate atmosphere.

To pull this off requires legwork and deep research. It needs in-depth understanding and an ability (usually acquired via extensive interviews) to get inside the heads of people who were actually there and experienced whatever it was, first-hand.

Michael Lewis is a story-teller par excellence, perhaps the best writer in the world when it comes to a certain kind of non-fiction. All his books have broken new ground. He uses the techniques of faction and uses them well.

But what makes him really special is his ability to understand complex financial and technological processes. He has a genius for finding and immersing himself in such complexities just as they become topical and mainstream. He can get into the heads of people who do complex, unusual things. And, he can describe those things in terms that the layperson understands and finds it possible to engage with.

The Big Short: Inside the Doomsday Machine (2010) deconstructs the American housing bubble of 2004-2008, which led to the so-called subprime crash. When the bubble burst, it devastated millions of ordinary Americans who had never indulged in dodgy financial speculation. In fact, the fallout affected hundreds of millions who had absolutely nothing to do with America, or real estate. It triggered a global financial crisis. We – meaning the world at large – are still suffering some consequences, a decade later.

The US housing bubble inflated for a multitude of reasons. But the underlying cause was greed. Realtors set up what looked like an endless cycle of profitable churn: sell a house on mortgage, swallow the commission, resell the mortgage, pump the money back into another sequence of selling mortgages.

Wall Street developed ingenious, almost magical ways to try to offset the risks of default on a mortgage by building complicated derivatives structures backed by using those mortgages as underlying securities. But the credit rating agencies and mortgage issuers didn’t bother to check for one basic condition: could the buyer repay? NINJA loans became common. People were offered home-loans when they had No Income, No Job, No Assets.

The fun continued for years. It collapsed in a cascade of defaults, which led to an avalanche of more defaults across the financial system. American real estate values dropped by 90-95 %. People just walked away from their houses as values collapsed.

Most of the world’s financial institutions (including Indian banks) had exposure to this. Institutions found they owned tonnes of worthless paper that ultimately entitled them to auction worthless houses, which nobody wanted to buy.

Cutting through the jargon

So far, so arcane. But Lewis found an unusual bunch of people to carry the story. A few people (including Raghuram Rajan) had diagnosed this train wreck before it happened. Very few people found ways to make money by anticipating the collapse and shorting the mortgage market.

“Shorting” normally means selling something you don’t possess and waiting for the price to fall, so that it could be bought later at a profit. Here, the short players found ways to use the derivatives and asset-backed securities (credit default swaps, collateralised debt obligations and so on) that the wizards of Wall Street had designed. So, while the American real estate market collapsed and the global economy went into crisis, a few made huge sums.

These short players were unusual characters, eccentrics. Each had some character quirk that allowed them to steer clear of the herd. Some of the people Lewis profiled were also oddly moral in their own ways. Each had tried to raise the alarm and point out impending disaster. Each had been ignored and then decided that they might as well profit.

Then, Andy McKay went and made a movie out of this morality tale, titled The Big Short. Which means that those oddballs had to be portrayed onscreen.

Ben Hockett (played by Brad Pitt, Ben Rickert in the movie), Charlie Ledley and Jamie Mai ran Cornwall Capital (Charles Geller, played by John Magaro and Jamie Shipley played by Finn Wittrock). Cornwall worked out of a garage in California. It specialised in long-shot bets.

Dr Michael Burry (Christian Bale) is a medical doctor, a neurologist self-diagnosed with Asperger’s Syndrome. He is one-eyed. Burry had intense focus, and an ability to dissect very complicated derivatives and balance sheets. He is also utterly useless at communication. Burry locked in his investors through complicated legal fine print in contracts. They thought he was insane. They all wanted to exit his shorts. Eventually he made $800 million for them. But they hated him anyway.

Steve Eisman (Mark Baum, played by Steve Carell) is a very rude man according to his wife, and unprintably profane, according to people who aren’t quite so fond of him. Eisman was a lawyer obsessed with the parallels between his own (real) life and the fictional career of Peter Parker (Spiderman in Marvel Comics). As a young atheist from a Jewish background, he opted to learn the Talmud so that he could embarrass his observant Jewish parents by quoting and parodying Judaic scripture at inappropriate moments.

Greg Lippmann (Jared Vennett, played by Ryan Gosling) bet against his own firm. He created an epic 73-page presentation that explained why his firm was making a mistake. It’s still floating around the net. Read it if you want background.

I had only one minor problem with the book. It got a tad too moralistic for my taste in its attempts to explain how this happened and how outrageous it all was.

However, a book has one major edge over a movie purely in terms of medium. In print, given Lewis’s genius for simplifying complicated shenanigans, it is possible (not easy, but possible) to explain how derivatives work. Those explanations get very, very convoluted and a little incoherent in the movie.

In other respects, the movie is fast. The dialogue is snappy. The consensual madness of Wall Street and its wilful ignorance of danger are brilliantly portrayed. There is a tearjerker element in that it shows ordinary people losing homes. But that did happen. Real estate values were wiped out across entire states. Detroit has never recovered.

Subprime was the first time since the great Depression (1929-37) era that American real estate had lost value. The quintessential Depression book-movie combo was The Grapes of Wrath, which portrayed a family turned into refugees by the Oklahoma Dust Bowl. The Big Short is the Subprime equivalent.

Steinbeck wrote fiction that closely adhered to fact. Lewis has gone the other way and written fact that seems almost fictional. Steinbeck’s characters picked apples in Californian orchards after losing their homes and livelihoods. Lewis’s folks cherry-pick data off electronic screens. Only the ones that get it wrong lose their homes. Both writers walk us through the moral black holes that dotted two different eras. The analogies and the differences probably tell you a fair amount about how the world has changed in the last 80 years.