4 February 2016
Trick or Cheat
by J.R.Thomas
With exquisite and ironic timing, the UK opening of the film “The Big Short” coincided with the verdict of the jury in the latest LIBOR trial. As audiences laughed and hissed at the wicked bankers and their market manipulations, twelve good persons and true in a jury room in Southwark decided that five of the six banker defendants in the long running and complex market manipulation case were “not guilty”. (One case is still proceeding.)
Film is a very easy way to manipulate popular emotions. A dark room crowded with people, the skilled use of imagery, lighting, colours, music, the presence on screen of great actors twirling figurative villainous moustaches or tugging at the heartstrings of the popcorn eaters in the windowless auditorium. We all end up streaming out to the tube station believing, at least for a few minutes, what the film maker wants us to believe. Well, usually. Famously, Oliver Stone in his 1980’s epic “Wall Street” wanted us to decry the villainy of the banking and broking professions (nothing changes). The great set piece evidencing the appalling mindsets of evil bankers was his character Gordon Gecko’s (Michael Douglas in magnificent form) declamation that:
“Greed is good, Greed is right. Greed works.
Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.
Greed, in all of its forms — greed for life, for money, for love, knowledge — has marked the upward surge of mankind.”
Except, most American audiences missed that this was intended to be drippingly ironical and cheered it to the rafters. Gecko became almost an American folk hero. History may well decide he was in a significant way responsible for the 2008 crash, in his glamorisation of bankers and Wall Street and the pursuit of fast wealth.
The Big Short does not allow you to overlook its intended moral demonization of Wall Street and its wicked inhabitants. No subtle Gecko types here. The bankers are fat and sleek and stupid; the anti-Wall Street types are troubled, eccentric, family loving, hard-working, sweat shirt and beard wearing. Neck ties bad: T shirts good.
Here is the plot (contains some plot spoilers). In the early 2000’s the rapid growth of the residential mortgage market led the Wall Street banks to start devising products to squeeze more profits out of mortgages. (As a by-product they made mortgages cheaper and very much more widely available, but let’s not go there today.) More and more money got squeezed out until a few contrarian thinkers began to wonder how far this bull run could actually gallop, and started betting the other way. The pinstriped fat types took their commission on the new products, twirled those metaphorical wicked moustaches, and the bull market ran on and on. Then one day it stopped and Wall Street was full of broken brokers carrying their possessions home to their over-mortgaged and soon to be repossessed houses. Our hero types cashed in their vast returns and went home to their wives and children and basement drum kits. Triumph of good guys, but, damn me, none of the bad guys went to gaol – in fact, double damn, today they are all back on Wall Street thinking of new evil products to sell to innocent Americans.
Yes, well. The Big Short does spend some time trying to finger a villain or two, including a magnificent and cruel satire on a rating agency manager whose eyesight is seriously defective. Cruel, but funny. The problem is that most of the people who got so rich and then so embarrassingly ejected into the pitiless canyons of New York carrying their office possessions in a cardboard box (“No talking to the press!”) were not villains. Their crime, which is most certainly not a crime though it is in life often a mistake, was to go along with the herd mentality. They did not stop to say “How long can this go on?” Our sweat shirt wearing heros did. They did better than that – they bet the other way and won.
There may have been a few criminals among the pinstriped masses, a few who altered a figure or two, who sold things to the public without revealing that they had conflicts of interest. But most everybody just wanted the thing to go on for ever; the brokers, the bankers, the lawyers, the rating agencies, the politicians, the real estate brokers, most of all the home owners who took the growth in the equity value of their house, remortgaged and spent the proceeds on a new car or widescreen TV. Everybody may have been blinkered and stupid, but that is no crime.
History tends to be on the side of the winners. The winners here were the contrarians, who took big risks (generally using other people’s money) and in the end got very rich. Which is where the film stumbles a little. The heros made a massive killing; just as the villains had been doing, by taking risks, usually using other peoples money. The heros, being nice types of course, spent a little of their massive gains wisely – spending more time with their families, and, in one case, creating an orchard. But they do not appear to have given it all to charity or gone off to Africa to alleviate poverty; though maybe the real life characters on which the movie good guys are based ticked the box for no publicity.
Investment is not far from gambling. Unfortunate or unskilled investors are just like unfortunate or unskilled gamblers. If you get it wrong too big and too often you go bust. If you are clever (or lucky) you can make vast amounts. Then the two things tend to diverge; skilled investors know when the odds are tipping against them and get out; or, even better, invest against what they have just been investing for. That is how markets work; they go on and on until they have lost touch with the underlying reality. Then, they crash. Can they be manipulated? Yes, if everybody plays along with the growing detachment from reality, and the investors can keep putting more money in. But eventually reality will always win, and those holding the paper at that point will lose.
We don’t know what happened in the jury room at Southwark Crown Court in the LIBOR rigging case. We must be careful what we suggest, but it seems likely that in the complex operations of currency markets the jury decided that taking positions and preventing or allowing things to happen is just how participants in markets work to make money. Markets are akin to the high seas, they are dangerous places for amateurs and the longer they run one way, the more dangerous they are likely to become. Just because you turn out to be the loser does not mean that the winners were villains. Usually, they were just cleverer – or luckier – or longer pocketed – than you.
Those audiences who hiss the Wall Street villains and prefer heros in sweat shirts are really just cheering the guys who won by being braver than the herd, and backing their bravery with much money. They are right to do so – to prosper and survive, the human race needs more people who will be contrary, awkward, difficult, off-beat, who don’t wear shoes in the office. They are the ones who will not get too caught up in the prevailing emotion. They are the ones who make markets work by stopping them running too far. They are the ones who invent new ideas, who think original thoughts.
Just remember; next time the market may be backing the prevailing orthodoxy of sweat shirt wearers; the money cascading to the tieless ones. But it may be that next time the pondering contrarian is the guy in the suit and tight tied tie. Think about that and you just might make money too.
