The Big Short explanation

If you’re making a movie about markets and money, do you try to explain the nitty-gritty financial details? Or not explain them at all?

When Martin Scorsese made The Wolf of Wall Street, a 2013 Leonardo DiCaprio blockbuster about a huckster who dupes wealthy investors, he didn’t try to explain the inner workings of brokerage firms and markets. Instead, he lavished attention on the booze, drugs, and mind-boggling sexual excess of the movie’s anti-hero. (Or so I am told: After reading reviews, I decided The Wolf of Wall Street probably wouldn’t satisfy a financial nerd like me.)

In The Big Short, a movie that won an Oscar in February for best adapted screenplay, director Adam McKay gambled on explanation. Based on a book by Michael Lewis of Moneyball fame, the film uses an ingenious strategy for partially explaining the complicated mortgage transactions—“collateralized debt obligations,” or CDOs—that lay at the heart of the 2008 financial crisis.

Rather than cutting to a professor with a whiteboard, The Big Short splices in three celebrity cameos: One by Margot Robbie as she sits in a bubble bath (a winking reference to her role in The Wolf of Wall Street, I’m told), one by TV chef Anthony Bourdain, and one by singer Selena Gomez. The cameos are comical, as are a series of asides by a sleazy but mostly honest character played by Ryan Gosling.

The movie’s overall anti–Wall Street message is hard to miss: My 22-year-old son’s first comment as we left the theater was “I hate Wall Street.” This puzzled me, since he isn’t the type to condemn markets and finance. But perhaps it shouldn’t have, since the movie’s heroes are quirky outsiders who saw the 2008 crash coming, while its villains are insiders who are morally compromised, clueless, or both. I asked my son if he now understood what a CDO is. His answer: “No, not really.”

I suspect he wasn’t alone, and his reaction hints at the danger of movies that purport to explain complicated financial transactions. The Big Short’s cameos are a clever—and largely accurate, in my view—comic riff on the problems created by mortgage-related securities during the 2008 crisis, but you aren’t likely to understand the transactions after the movie unless you were already familiar with them. For the record, a CDO is created by buying lots of mortgages, packaging them together in a new entity, and selling their debt and interest obligations (the “mortgage securities”) to investors. Because the mortgages are packaged together, these securities were thought to be a safer investment than buying a single mortgage.

And CDOs were only the beginning: By taking some of the less desirable mortgage securities from a CDO and putting those in a new entity, the wizards of Wall Street created what was known as “CDO squared.”

The Big Short doesn’t try to unpack all these details and leaves out many of the other factors that contributed to the crisis. Wall Street probably wouldn’t look as bad if the missing details had been included. (Also, by way of warning, the R-rated film contains offensive language throughout and has several scenes with nudity.)

Still, my reaction to The Big Short was amazement that all of us had just watched a two-hour-plus, star-studded movie almost entirely about sophisticated financial transactions. The story is compelling overall, and it makes a serious—and funny—attempt to make sense of the financial crisis. Even if it doesn’t quite explain those dastardly CDOs.