The Big Short Spins Historical Lead into Oscar Gold

The Big Short (Paramount)

Adam McKay, director of Anchorman: The Legend of Ron Burgundy and Talladega Nights: The Ballad of Ricky Bobby, took home the Academy Award for Best Adapted Screenplay for his latest motion picture, The Big Short. McKay shared film’s highest honor Sunday night with co-writer Charles Randolph, who helped bring to the Silver Screen Michael Lewis’s book about the housing bubble and consequent 2007-08 financial meltdown.

“Thank you to Paramount for taking a risk on a movie that’s about financial esoterica,” McKay said at Hollywood’s Dolby Theater as he clutched his shiny gold statue. “If you don’t want big money to control government, don’t vote for candidates that take money from big banks, oil, or weirdo billionaires. Stop!”

McKay’s outburst echoes his picture’s point: Blame Wall Street first. His anti-business perspective is no huge surprise. McKay is a member of Artists and Cultural Leaders for Bernie Sanders. The socialist U.S. senator, for his part, won Super Tuesday contests in Colorado, Minnesota, Oklahoma, and his home state of Vermont. Still, Sanders trails former secretary of state Hillary Clinton in Democratic convention delegates 427 to 1,052.

While some 37 million Americans watched McKay score his Oscar, some were not amused.

The Big Short should be re-titled The Big Lie,” says Brian Wesbury, chief economist with suburban-Chicago-based First Trust Advisors and a senior fellow with the Heartland Institute, a free-market think tank near the Windy City. “The Left never lets a crisis go to waste, and just like with the Great Depression, it has created a narrative that blames Wall Street and praises Washington. It is true that a few people made gobs of money shorting the housing market. It’s absolutely not true that this crisis was created by capitalism and fixed by D.C.”

RELATED: Armond White Reviews The Big Short

American Enterprise Institute scholar Peter Wallison — author of Hidden in Plain Sight, an autopsy report on the financial panic — narrates a new AEI video that clearly explains how things went so spectacularly wrong.

In 1992 the U.S. home-ownership rate had been stable, at 64 percent, for 30 years. Rather than leave well enough alone, Washington went hyperactive.

First, it targeted two private, government-guaranteed companies called Fannie Mae and Freddie Mac. They traditionally had bought prime-quality loans, usually backed by 10- to 20-percent down payments. These high standards, Democrats and Republicans whined, made it too hard for low-income consumers to buy homes.

Second, “In 1992, Congress adopted a program called the Affordable Housing Goals,” Wallison explains. President G. H. W. Bush signed this measure — yet another Bush-family socialist triumph. Starting in 1993, 30 percent of Fannie and Freddie’s loans had to be acquired from low-income borrowers.

But the party was just starting.

In 1992 the U.S. home-ownership rate had been stable, at 64 percent, for 30 years. Rather than leave well enough alone, Washington went hyperactive.

Third, Washington poured Bacardi 151 into the punchbowl. By 2008, the Department of Housing and Urban Development had hiked the Affordable Housing Goals to an intoxicating 56 percent. Consequently, Wallison notes, “between 1993 and 2008, Fannie and Freddie began to accept increasing numbers of non-prime and other risky mortgages, with low or no down payments and from borrowers with poor credit ratings.” Private companies soon adopted Uncle Sam’s sagging standards. Among all U.S. mortgages in 2008, 56 percent were subprime (no relation to the aforementioned 56 percent).

“The big problem was pressuring banks to make nothing-down loans and other things that led to people not having equity in their homes,” says Todd J. Zywicki, executive director of the Law & Economics Center at George Mason University School of Law. “Fannie and Freddie basically provided liquidity by being willing to buy these loans, even with nothing down and the like.”

#share#Zywicki believes, however, that consumers played a major role in this tragicomedy. The Big Short dramatizes this via a Las Vegas stripper who uses her exotic-dancing income to buy five different homes, presumably through the loose money that proliferated back then like crisp $20 bills at a gentleman’s club.

“We basically turned American middle-class households into a bunch of real-estate speculators, living in their investments,” Zywicki adds. “Because of the combination of very low interest rates (as a result of post-9/11 Federal Reserve policy) and nothing-down mortgages, people were able to get into their homes with zero down-payment and very low interest rates, especially on adjustable-rate mortgages (which soared percentage-wise during the real-estate run-up). Then, when interest rates adjusted and housing prices fell, and people were in negative equity, they just walked away.”

Zywicki also notes that the “greedy banks” did not just write loans and then deliver them to Fannie and Freddie, which gobbled them down.

The Big Short ignores why the banks themselves ended up needing to be bailed out — because they were eating their own garbage!” Zywicki says. “They were not just selling it to third parties. They were holding it themselves. My understanding is that in some of these banks, one side of the bank was originating these things, and another department was buying them. If they had just been originating and selling then, when the mortgages failed, they wouldn’t have been affected.”

Indeed, when the 2008 meltdown began, private-sector balance sheets held 24 percent of these toxic mortgage-backed securities, worth some $1.9 trillion. The other 76 percent belonged to Fannie, Freddie, and other instruments of Washington’s “Houses for All” obsession. Fannie alone held $878 billion in dodgy loans, defaults on which generated 81 percent of Fannie’s 2008 losses.

‘We basically turned American middle-class households into a bunch of real-estate speculators, living in their investments.’

Even worse, as Fannie and Freddie grew fat on these mortgages, they essentially lied about their weight. As Wallison wrote in the December 21, 2011, Wall Street Journal, the Securities and Exchange Commission discovered that in March 2006, Freddie claimed that its subprime exposure in 2004 and ’05 was “not significant,” even though such loans back then equaled 10 percent of Freddie’s exposures. Fannie disclosed in 2007 that it held only $8.3 billion in volatile “Expanded Approval” mortgages. The real figure was $94 billion — eleven times the stated amount. No one at Fannie or Freddie ever was prosecuted for these acts of securities fraud.

When all of these weak assets collapsed beneath Wall Street like a rickety balcony, major financial firms tumbled into the river and bobbed toward the waterfall. Federal bailouts for AIG and Bear Sterns suddenly got tossed into the rapids, like multi-billion-dollar lifelines. Lehman Brothers cascaded over the falls. Some sopping-wet banks, like Wachovia and Washington Mutual, were pulled to shore and then steered into shotgun weddings with high-and-dry financial firms. The U.S. Treasury force-fed other healthy banks and investment houses taxpayer funds, which these companies repaid in 2009.

In the nauseating words of then-president G.W. Bush: “I’ve abandoned free-market principles to save the free-market system.”

The Big Short is cleverly scripted, skillfully acted, energetically edited, darkly humorous, and highly entertaining. See it. But remember that its screenwriters spun historical lead into Oscar gold.

Deroy Murdock is a Manhattan-based Fox News contributor and a contributing editor of National Review Online, and a senior fellow with the London Center for Policy Research.


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