The Big Short Movie Review

Welcome to the True Condos podcast with Andrew la Fleur, the place to get the truth on the Toronto condo market and condo investing in Toronto.

Hi, welcome back to the show. Once again, Andrew la Fleur, and thanks for listening to this podcast. We’re going to be doing something a little bit different today on the podcast. For the first time ever, I am going to do a movie review. That’s right, we are now reviewing movies at the True Condos podcast. Well, you might ask are you reviewing a movie. What does that have to do with real estate investing? Well, yeah, there’s not too many movies that are out there that are about real estate or real estate investing, so we’ve never done this before for that simple reason.

There’s a great movie that’s just come out recently. I had a chance to watch it. I definitely recommend anybody who’s a real estate investor to check this movie out. It is called “The Big Short.” You might have heard of it. It’s getting a lot of Oscar buzz this time of year as the award season’s coming up for Hollywood, and it has a rock star cast, Steve Carell, Ryan Gosling, Brad Pitt, Christian Bale, just an unbelievable cast. Very well-acted, great story-telling, well-directed, great script. People are saying Steve Carell, and especially and Christian Bale, are possibly up for some big awards this year for their acting jobs there. A great, great movie. You definitely want to check it out. It’s called “The Big Short.”

For the trailer, to watch the trailer for this movie, just head on over to truecondos.com/thebigshort, and you can watch the trailer and get the show notes for this episode there. It’s in theaters now. It should be on DVD probably in a few months from now.

Basically, if you don’t know about the movie, if you’re not familiar yet, it is about the housing crash in the United States. It’s about the events that happened sort of between 2004, 2005ish and when everything just came crumbling down in 2008. It sort of follows a few outsiders, a few … It’s sort of an outsider story, these guys who are fighting the man, fighting the system, so to speak, and they, while the rest of the world was sort of falling apart, especially America, they were the ones who sort of saw this happening, saw it coming before it did. They were able to best against it and profit tremendously from it.

Really, the story is about … It’s about a lot of things. It’s a very layered movie, but it’s really about the housing crash and why the housing crash happened and sort of … It’s obviously a scathing critique of a lot of things, and people are still suffering 10 years later, especially in America, because of this big event that happened, but it’s really about why did this happen, how did it happen, and I guess the underlying message sort of through the movie is, “Let’s not have this happen again” and what we need to make sure as a society that we don’t let it happen again.

I wanted to dive into this movie a little bit and dive into the crash a little bit. Again, it’s something that’s been talked about a lot over the last 5, 7 years in every form of media, and people have constantly talking about the housing crash, but I don’t think a lot of people, even most real estate investors, don’t have a good grasp of exactly what happened and why it happened. By all means, I’m not going to get in-depth here in this podcast but do want to touch on it a little bit and talk about that a little bit here today and talk about the movie and what I thought about it and talk about could this happen here, obviously, is a bigger question for us Canadians here in Toronto investing. Could this happen here is an interesting question to look at.

Well, let’s start with why did this housing crash happen? Well, I think the movie’s pretty clear that, and it’s pretty clear from this story, that underlying this whole thing was greed. That’s a common theme in the movie. The movie’s apparently based off of a book, “The Big Short.” I haven’t read it, but apparently the book is even better. I need to check that out.

Underlying it all was greed. Greed was really the driving factor of this whole catastrophe and this whole collapse and was really the driving force that caused this thing to get built up so much before it finally collapsed. Banks created this mess, really, is what the movie is saying. The banks, the big banks, are to blame. Ultimately, the big banks are to blame, but we all had a role in it. The public had a role in it. The governments had a role in it. Investors, investment banks, had a major role in it. Everyone worked together, sort of spear-headed by the banks and driven by greed … Everyone created together to create a systematic monster, like basically a form of a very complicated and maybe you could say it’s the largest pyramid scheme of all time in a sense that was created.

The pyramid was inevitable that that was going to collapse, and ultimately that’s what happened. The whole thing collapsed, of course, in 2008. The banks started failing. Major companies all started failing, and the whole global economy went into a free fall. That was sort of why it happened, but how did this actually happen, again, to recap that from the movie and just from our experience and looking back now with a few years behind that.

How did this happen? Well, the banks basically … The way they explain it, and they explained it very well in the movie, even if you’re not a financial, analytical, technical sort of a person, it’s definitely still a good, entertaining movie to watch, and they’ve done a great job in sort of … through humor and through other creative means to basically explain the crisis and explain how it all happened. Basically, how did it happen? Well, the banks created essentially this profit-making machine by bundling mortgages together. They took mortgages, thousands and thousands of them. They bundled them off, and they sold them as bonds.

They figured out a way by doing that, putting these mortgages all together, of creating a profit. They had this little machine running for a while, and things were going great, but then, like anything, human nature, sort of greed, started to take over. Slowly and slowly it sort of crept in and took over.

They needed that machine, essentially, to keep going, but when things started to slow down, and when the real estate market started to slow down at all, that machine started to slow down, so the profits started to slow down. The banks started to get more and more creative, you could say, and they started to bend the rules. They started to think of ways to keep that profit machine going and keep that profit machine churning to continue to spit out money.

As they started bending rules, they started … You know, they needed more mortgages in the back-end of this machine. To keep feeding this machine, they needed more and more and more mortgages all the time to grow this thing and to be able to sell them off. They started taking lower quality mortgages and mixing them in. Then they just started saying, “Well, we need more people to get mortgages,” so they started lowering thresholds and the rules and bending the rules to allow more people to get mortgages.

Eventually, it ended up with people … These so-called ninja loans. They talk about that in the movie. There’s some great scenes where they fly down to Miami at the height of the housing market in like 2005, and there’s just a great, telling scene where they’re basically meeting with strippers and somebody like a stripper who’s just earning all cash, and just a very telling scene where the stripper’s basically saying that she owns 5 houses and a condo, and it’s just like sort of light bulb moment for them where they said, “Wow, this whole thing is just going to collapse. Like, this just makes no sense. People are getting mortgages that have no business getting mortgages, let alone they’re getting multiple mortgages.” They’re refinancing these properties to sort of stay on top of them.

The other big thing was teaser mortgages. They had these mortgages … It was a very wide spread where you’d start off with a very low rate, and then after 1 or 2 years, that rate would jump up dramatically. These people who really shouldn’t have gotten the mortgage in the first place, suddenly their payments are going up 50% or more. That’s just a recipe for disaster. People started defaulting on those mortgages. They started not to pay them. Things started to crumble apart.

It worked for a long time. The machine kept working for a long time because prices kept increasing. Once that started to slow, they got more and more desperate, and greed just was more and more toxic in terms of how they responded, and they just made it worse and worse for themselves rather than sort of stopping it. It just became worse and worse.

The public really turned a blind eye to this because from the public’s perspective, they’re getting rich. “I own 5 houses. Property values are going up, so I’m just going to keep this going. I’m not going to ask any questions.” From the government perspective, they really turned a blind eye because they were saying, “Well, the economy’s doing great. Look at GDP. GDP’s growing. People are spending. Things are looking great. People have jobs. Everything’s rocking and rolling, so yeah, the housing market’s rock solid. We’re not going to investigate anything further into it because things are looking great.” As pathetic as that now sounds looking back, that’s the story that they paint in this movie.

The whole thing just collapsed, of course. It was inevitable that the whole thing would collapse once all these factors kind of came to a head and all these people who were just getting mortgages just couldn’t pay those, couldn’t pay their bills. They just couldn’t pay their bills, and default rates went way up. These mortgages were … More and more of them were turning to junk. The whole thing just collapsed. All these bonds and CDOs, as they’re called, these mortgages they bundled together and they sell to investors, and they had all various complicated layered schemes to sell insurance on them. It’s starting to get very complicated and very strange towards the end.

The whole thing just utterly collapsed, and it was just an exponential decoupling, an exponential … Wasn’t just a surface-level thing. It just affected every area of the economy, and ultimately it spread into Europe because all these banks in Europe were also exposed to these bad loans as well. Of course, the rest is history, as they say. The whole thing fell apart.

That’s sort of a summary of why it happened and how it happened. Again, definitely watch the movie and check it out, but what was the purpose of this movie? I think the purpose really was to show Americans and the world what really happened is to understand why 10 years later after these events, many people, especially in the US, are still suffering. In some ways, we are as well. In Canada, our economy is still … It’s growing, but it’s growing at a very slow pace.

What was the purpose? What difference do I think this movie’s going to make to the real estate investor as you’re watching this? Well, I think you have 2 potential reactions. One, as you’re watching this movie, you can have more confidence in the Canadian real estate market and feel better about yourself as an investor, and number two reaction is you can run in fear, essentially. You can say, “Wow, this is scary. This is something that I don’t want to be a part of. I don’t want to invest in real estate because look at this horrible thing that happens.” Those are kind of two reactions that you can take to it.

Obviously, my reaction watching this movie is a tremendous amount of confidence in the Canadian real estate market and understanding that this is such a different situation here, completely night and day, in comparison to what was going on in the United States 10 years ago.

I think, at the same time, to be fair, it is important to note that this could happen here. This could happen anywhere. It is important as Canadians and as anybody, governments, and … It affects all of us to understand the causes of this crisis and the reasons why it happened and how it happened and how it developed into something that was such a horrible monster that just tore everything apart. Again, it’s important to note that this could happen here. It could happen anywhere. I think you have to ask yourself, “Well, what is the likelihood of it happening in Canada? Do we have the criteria that were in place in the United States that caused these things to happen? Do we have subprime loans?” Well, yes, we do. We have forms of lower-quality mortgages, yes. Are they widespread as much as they were in the United States? No.

Do we have ninja loans and high fraud levels and high default levels and adjustable sort of rate mortgages or teaser rate mortgages that jump up after the first year or two? No, we don’t have any of those things. Do we have a massively corrupt banking industry that is profiting from bundling mortgages together and selling them as CDOs and claiming that they are very low risk when in fact they are very high risk? Well, honestly, I don’t know. I’m not a banker. I’m not a financial regulator. I don’t know if there’s massive corruption of this scale in the banking industry in Canada.

However, as a logical person, I look to the evidence, and the evidence seems to suggest that, no, this is not the case at all in Canada. We don’t have anything like this here. We don’t have any reason to believe that there’s this corruption and greed driving our system, and certainly, we don’t have any evidence to suggest that these bundling of mortgages that are really low, low-quality mortgages that are being sold as high-quality mortgages is happening here in Canada.

If anything, I think we’re really going in the opposite direction. We’re seeing increasing government regulation, increasing government oversight, increasing government intervention into our housing markets. Just look at the last 5 years or so and the number of times that the government has intervened one way or the other into the housing market. Even banks themselves were seeing it as well, whether it’s driven by profit, or whether the government is sort of behind closed doors talking to banks and saying, “Do this or do that,” I’m not sure.

One simple example is, in the past year or so, as we’ve seen the Bank of Canada lower the prime rate for the first time really ever in history, the banks have not followed suit and lowered the rates of their prime in lock-step with the Bank of Canada. Essentially, the consumer now is not getting mortgage rate as low as they have at every other point in time in history when the Bank of Canada makes a move on interest rates. To me, that’s an example of banks in the private sector sort of … Whether it’s good or not, I don’t know, but they are, in a sense, intervening and artificially restricting the demand for real estate in Canada by doing that.

I’m sure the government is more than happy to see them do that, even though you could argue because as a consumer, it’s not fair. It’s not something that has ever been done before; it’s unprecedented. That is sort of the tone and the direction of the markets here in Canada. Yeah, in conclusion, I think that this … Again, nothing has changed my opinion by watching this movie about the Canadian real estate market. I think we are on rock-solid ground, that I think we are in a great period now of long-term, steady, slow growth, especially in the Toronto area, as we always talk about. Especially downtown as the population continues to grow, as our city continues to be highly-desirable on the international stage, and quite frankly, as our affordability’s still very reasonable, very low, both from an internal perspective, but also comparing ourselves to other cities worldwide. We’re still very affordable and a great place to live, and a great place to invest.

That was kind of maybe the strangest movie review of all time, but hopefully you enjoyed listening to that, and hopefully you get a chance to see “The Big Short” and check it out. In my conclusion, I give this movie “true” thumbs up. Sorry, I couldn’t resist. True thumbs up. You’ll hopefully understand what I’m saying. Go ahead and watch the movie trailer over at truecondos.com/thebigshort, and check out the movie in theaters or on DVD in a few months when it comes out.

Thank you again very much for listening to this week’s episode. Until next time, I hope you have a great week, and happy investing.

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