The Big Short is a nonfiction book that ties the stories together of a few people who predicted the 2008 financial crisis and made massive profits from betting against the housing market. The book dives deeper into how the housing bubble was created by risky mortgage lending, subprime mortgage backed securities, and the complicity of banks and rating agencies. The book also follows the stories of hedge fund owners like Micheal Burry and Steve Eisman, who saw the potential collapse and how unaware Wall Street was of the risks. The book ultimately highlights the greed, corruption, and failures that contributed to the worst financial crisis in history. While we are analyzing the big short, we have connected it to the Human landscapes in SW Florida pictures. This is a series of photographs that all have a commonality. Within this picture essay these photographs are all of developments within SouthWest Florida. However, it is important to note that most of these developments are incomplete or partially complete. Many of these incompletions are due to bankruptcy and the partially complete are due to foreclosures. Although amongst these photos there are completed developments full of 100s of houses. You must also know that they are complete but the houses are completely empty. It is hard to pinpoint an exact reason for the financial loss within these developments, it can be assumed and connected to the concepts stated and explained within The Big Short. We will analyze these terms and what they mean Risk, Trust, Foreclosure, Mortgage, and Moral Hazard. Risk is defined in financial terms as “the chance that an outcome or investment’s actual gains will differ from an expected outcome or return.” (Investopedia). Trust is “a legal entity with separate and distinct rights, similar to a person or corporation.” (Investopedia). Foreclosure is “a legal process that allows lenders to revolver the amount owed on a defaulted loan by taking ownership of and selling the mortgaged property.” (Investopedia). Mortgage is “a loan used to purchase or maintain a home, plot of land, or other real estate.” (Investopedia). Moral hazard is “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.” (Investopedia). Throughout this essay we will be unpacking each concept and how they connect to The Big Short and the SW Florida pictures.
Moral Hazard is a top concept within The Big Short. Many bank owners knew and did not care about hurting the working people who lost their houses, 401k plans, and money. “And that banks that used it were really just banking on being able to rip off poor people even more than they could if they charged them for their checks.” (Lewis, pp. 19-20) Risk is represented in that the economists and big finance institutions took the risk in the trading of these CDO’s. These CDO’s and the mortgages given at the time were actually hurting the people. The mortgages given way exceeded what people could pay causing most of the time for houses to go into foreclosure. During the time in which this trading was happening the money was coming in and no one could’ve expected the foreclosures that would happen by the thousands. Many of the loans that were given people couldn’t afford. A lot of houses went into foreclosure because of the loans given out. “On June 25 the total number of loans in default spiked to 18.68% percent” (Lewis, p. 197) The Big Short pays a lot of attention to the bankers and the money makers rather than talking about those who had faulted on their loans and the effects these loans had had on the people taking these loans out. The number of people who couldn’t or barely made their mortgage payments was large and it shows in the numbers. Within The Big Short mortgages were given despite evidence that they could be paid back. These mortgages were then sold from company to company as CDO’s. Economists had trust in the CDO’s they were buying, they had faith that the CDO’s would make them money. Was eager to make the most money and just did that. These shortly fell through and a crash happened and the CDO’s were no longer profitable.
Within the picture essay of the “Human Landscapes in SW Florida” At the time these developments were being built and or were built their emptiness was due to the mass of foreclosures due to the unreasonable mortgages given to people who were unable to pay these mortgages. This essay has examples of foreclosure like in pictures 1, 4, 13, 15 developments went bankrupt and had to stop construction. Also in pictures like 2,3,4,5 and so many show fully completed developments. To the eye they look full however it is stated in the beginning that most of these developments are empty due to mass foreclosures. Moral Hazard is represented in most to all of these pictures, these houses are built close to water sources like the ocean, man made lakes, or even rivers. The hazard with this is the potential for flooding, storms, or any other type of water related damages. These home owners had more care about the mortgages they were offered instead of the potential risks of being in such close proximity to water. Another course concept in this picture essay is trust in the literal sense banks granted money to these developers to build. But either the bank or developer fell through with money and they could not be finished, defaulting on their trust to the other party. It was also trusted that there would be people to fill these houses and they did. Until they could no longer make their mortgage payments. Developers took risks in building these developments with the promises they would be filled. Homeowners took risk of living near the water
Although it’s hard to make conclusions about these developments and the true story behind them by just having pictures. This is closely similar to the CDO’s in which no one truly knew what they were and it became hard to make conclusions about the CDO’s also. However, we can take the course concepts we have been focusing on to make connections between the picture essay and The Big Short. Moral Hazard is prevalent within both of these pieces for example the financial institutions that participated in the CDO trades had no care for what would happen to anything but their wallets, this carelessness led to the 2008 housing crisis. The photo essay shows the effects of the decisions of the developers and governments who made these housing lots prioritizing profit and growth, placing the weight of the consequences on vulnerable people and communities who are trying to live in these housing developments. Due to the crisis and greed of these large companies, countless homes are left vacant and thousands of people are forced to default on their mortgages.
“A giant number of individual loans got piled up into a tower.” (Lewis, p. 26) The metaphor of the tower is an interesting one, as Lewis describes that the mortgages with the lowest interest rates got paid back first and had the highest ratings. The lower floors had the lower ratings and the highest interest rates, but these floors were risky as you risked people defaulting on their mortgages. (Lewis) It was the higher interest rates that were more attractive as these mortgages would take longer to pay back making more money for those who owned the mortgages. However, the risk comes in because of the higher interest rates it makes these mortgages difficult for the payer to pay back causing in these defaults and foreclosures. The Big Short is a textual example of these defaults but the picture essay gives us picture evidence of this. In the picture essay all of these developments that are complete are empty like in pictures 16,19,21, and 22. Most of these houses in these pictures are empty due to foreclosures and defaults on mortgages. Customers trusted mortgage lenders and banks, “The subprime mortgage loan was a cheat. You’re basically drawing someone in by telling them, ‘You’re going to pay off all your other loans–your credit card debt, your auto loans—by taking this one loan. And look at the low rate!’ But that low rate isn’t the real rate. It’s a teaser rate.”(Lewis, p. 19)
There’s a quote in The Big Short on page 145 that says “The shotgun kicked and bruised your shoulder, but the Uzi, with far more killing power, was almost gentle; there was a thrilling disconnect between the pain you experienced and the damage you caused.” Although within the context of the book it is talking about guns and the shooting range, this quote applies to the whole housing economy of the time. During this time economists within the housing and mortgage industry were trading and selling these CDO’s. It wasn’t promised that these CDO’s would make any money but the risk was worth the outcome. This relates to the incomplete housing developments in pictures 1,4,13,15 of the picture essay because in the same way the economists were taking a risk in buying and selling these CDO’s banks were taking risks on developers and developers were taking risks on bankers. Bankers took the risk of writing these loans to developers to build these houses and huge developments. The more houses you have the more mortgages you can write, which means the more CDO’s you can sell and the more money you can make! Although it appears the crash and faulty mortgages caught up to the developers leaving their developments bankrupt and unable to complete.
We care because this was happening to other human beings. Customers were trusting banks and mortgage lenders to be honest and transparent with them. These banks and mortgage lenders were backstabbing customers by issuing high-risk subprime loans to borrowers who couldn’t afford them. This led to many people losing their jobs, homes that were in foreclosure, and poverty. These connections tell us about the housing market and how people interact with mortgages now because the 2008 crisis and the landscape photos taught us we must be more careful with who we give out loans. This taught the banks to be more strict about people’s FICO scores instead of giving away big loans to people with low/bad credit reports.