By: John McKiernan, Cassidy Hand, Ericeliz Carrillo, Kyle Footer, Rylie Capezzuto, and Mia Hendrickson
The images from “Human Landscapes in SW Florida” intersect with multiple course concepts that illuminate what we read in The Big Short. These concepts include liquidity, foreclosure, moral hazard, bad faith, toxicity, and expulsion. To grasp the significance of these concepts, it is crucial to understand their definitions, as many words can have various meanings. Liquidity can be assumed to be liquid, which is true in some cases, in other cases Investopedia explains how liquidity is, “the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price.” Next, as we have talked about in class foreclosure is the action when property is taken away if someone fails to pay their mortgage, Investopedia explains it as, “Foreclosure is the legal process by which a lender attempts to recover the amount owed on a defaulted loan by taking ownership of the mortgaged property and selling it.” Investopedia also describes moral hazard as, “the risk that a party has not entered into a contract in good faith or has provided misleading information about its assets, liabilities, or credit capacity.” People might understand bad faith as the intent of having an understanding that is not true. Investopedia states that bad faith is, “this can include misrepresentation of contract terms by using confusing language and unfixed rates and terms. This is purposefully done to avoid fulfilling the understood obligation.” Next is toxicity and many people understand that as something toxic or poisonous. Lastly is expulsion, oxford languages explain expulsion as the action of depriving someone of membership in an organization. Together tying the pictures from “Human Landscapes in SW Florida” and these six course concepts help us build a deeper understanding of what we read in The Big Short.
Throughout the book, Lewis repeatedly refers to the system of subprime loans as a tower, where “the top floors got their money back first and so got the highest ratings from Moody’s and S&P and the lowest interest rate.” However, “the low floors got their money back last, suffered the first losses, and got the lowest ratings from Moody’s and S&P” (Lewis, 26). In a literal sense, this relates to the concept of liquidity, something that often has a financial connotation. Furthermore, Lewis uses water to demonstrate the destruction of the subprime loan system and the subsequent economic crisis, with the lower levels of the tower—those with subprime loans—being the first to experience the flood. Although those responsible for the housing crisis claim ignorance over their actions, not all finance personnel were fooled, as pointed out by Lewis, who invokes the skepticism of Mike Burry, saying “As the value of the insurance contract changed—say, as floodwaters approached but before they actually destroyed the building—he wanted Goldman Sachs and Deutsche Bank to post collateral, to reflect the increase in value of what he owned” (Lewis, 49). Nevertheless, “In 2005, over $1 trillion of bonds like Toxie were created. It was an ocean of money flowing into the housing market, contributing to the crowds of people showing up at open houses—and to home prices that kept rising” (“Human Landscapes in SW Florida”). In this sense, the floodwaters persisted.
The aftereffect of the housing crisis is shown in “Human landscapes in SW Florida.” In these pictures, vast areas planned for development are left desolate and abandoned, a legacy of the housing crisis. The fact that the pictures were taken in Florida is significant because “First, the underlying loans were heavily concentrated in what Wall Street people were now calling the sand states: California, Florida, Nevada, and Arizona. House prices in the sand states had risen fastest during the boom and so would likely crash fastest in a bust” (Lewis, 184). Interestingly, while talking with Joel Greenblatt, Burry noted that “It became clear to me that they still didn’t understand the [credit default swap] positions” (Lewis, 191). This is significant because, unlike subprime loans and credit default swaps which were indecipherable, the Florida landscapes were optically pleasing with a clear structure and plan (often relying on basic grid structures). Although the reliance on subprime loans and credit swaps made the finance industry incredibly rich, it created immense poverty for the masses.
Acts of bad faith in the financial industry, according to Investopedia, can include using convoluted language and shady non-disclosure of policy provisions and exclusions. Insurance companies often prey on a client’s naivete and excitement in the process of purchasing their ultimate American home, achieving for themselves a steady salary while the homes sold were balanced on fragile ownership and immense risk. In Chapter 6 of The Big Short, while the reader follows Charlie Ledley, it says, “There was a thrilling disconnect between the pain you experienced and the damage you caused” (p. 145). Many of the characters indicated they understood the basic fact that something cannot come from nothing. They overlooked the collateral damage of their actions because they had so much personal profit. Moral hazard is a conscious and purposeful effort to lower one’s guard against risk because they know they will be covered if it in fact went all wrong. In The Big Short, Lewis uses the term moral hazard to describe these routine practices: “The subprime lending industry was fragmented. Because the lenders sold many–though not all–of the loans they made to other investors, in the form of mortgage bonds, the industry was also fraught with moral hazard” (p. 9). Again and again, the financial industry engages in moral hazard because they take huge risks and incur consequences they will ultimately be protected from. The same cannot be said for those who were not insured against all consequences and now face the loss of property, home, and financial security. The crash in the housing market was the result of many selfish decisions made by the various unregulated components and members of the Wall Street finance industry. Looking at Florida from above shows the gravity of what was lost due to these unregulated dealings. Countless dollars had been funneled into building homes that would never be accessible for the majority of Americans, some developments never completed and some just standing bare while an estimated 57,751 Floridians experienced homelessness in 2010.
During the housing crisis, many people’s homes would have been considered “toxic assets,” which are “investments that are difficult or impossible to sell at any price because the demand for them has collapsed” according to Investopedia. Because the housing market completely collapsed and so many Americans were in debt due to adjustable loan rates, they were forced to sell their homes back to the bank, expelling them in the process. This was because of a lack of understanding and an excess of fraudulence and corruption within Wall Street. A radio show from NPR documented their experience with the housing market, buying a house in 2005, in Florida they nicknamed “Toxie” because it was a toxic asset. This was not always the case though because “back in 2005, when Toxie was created, the housing market was booming, and mortgage bonds made it easier for people to buy houses.”(https://www.npr.org)
Though there was a risk across every state in the entire country, states considered “sand states” such as Florida were among the most affected because the “house prices in the sand states had risen fastest during the boom and so would likely crash fastest in a bust.” (Lewis p. 97) After this flood of money going into the market, a housing bubble unlike anything the United States had ever seen was created. Only when the bubble popped did “toxie” become a toxic asset, unable to sell on any market. As was the case for millions across the country, expelling them from their homes. Expelling is the act of “forcing someone to leave a place”(merriam-webster) which was evidently seen in the empty developments of houses or foreclosed homes in “Human Landscapes in SW Florida” and the article stating that “many homes there are empty and have been for years.” The toxicity from an asset goes hand in hand with the eventual expulsion of the homeowner.
Michael Lewis serves to show all the hidden intricacies of the 2008 housing crisis throughout The Big Short, directly representing the government’s neglect and abuse of the homeowners of this time. Tied with the toxie developments built in southwest Florida, we’re able to build a stronger understanding of the people’s struggle caused by their bad faith and misrepresentation throughout the early 2000s. Hundreds of thousands of people were tricked into buying toxic loans that ultimately led them to foreclosure and without any home at all. As banking industries like Moody and S&P became more and more focused on their own profit, the homeowners got washed out and forced lower and lower until they had nothing at all, as the banks specifically targeted them to take the hits first and whatever was left of the profits last. The housing industry specifically targeted the naivete of their clientele in order to enforce worse and worse policies that they themselves barely understood. This power struggle caused such a catastrophic loss that many of these victims still struggle with housing to this day, almost two decades later. Taking a look at the concepts of both the toxie developments and the Big Short endeavor to expose, we’re forced to see how the lack of regulations does nothing but favor the same industries that have only used homeowners in the past. One of the main focus points in The Big Short was how the crash was something everyone could have seen coming, had they only been paying attention. Understanding what led to the crash, and how those same practices are still in use today, and the lack of substantial change puts everyone at risk today. Furthermore, understanding the moral hazard we put ourselves in when working with these industries, as well as the bad faith they are known for allows us to move forward with a sense of security that these circumstances have otherwise taken from us.