How Concepts in The Big Short Relate to Images of Human Landscapes in Southwest Florida.
By: Nathan Walz, Cole Kominiarek, Jayden Prashad, Lauren Bieniek, Lily Scobbo and Samantha Kim
In class, we have been reading and discussing Michael Lewis’ The Big Short and how many of our course concepts have some sort of theme throughout the book. To supplement The Big Short we also watched the documentary Inside Job narrated by Matt Damon. Both the book and documentary focus on the 2008 stock market crash and housing crisis, giving the viewer a look at what was happening behind the scenes. The Big Short pays closer attention to what led up to the crisis while Inside Job focuses on what was going on during and after the fact. As we continued to read and talk about The Big Short, we also viewed images of human landscapes in Southwest Florida and worked to connect them to the text. The photographs were from a satellite of many different neighborhoods and landscapes that all had their own sort of structure. For example, some photos had multiple neighborhoods that were all cul-de-sacs while others had grid-style streets with houses that were close together and similar looking. This forced us to practice apophenia, which Beth described in class as the human tendency to see patterns. By observing images that all had their own sort of pattern, we were able to connect to The Big Short by thinking about the patterns that occurred throughout the crisis. More specifically, how during the time there were many powerful institutions such as rating agencies and investment banks that continuously made very risky decisions. They made decisions without thinking about who would be affected and to what degree. This cycle or pattern of poor decision making is ultimately what led up to the crisis The Big Short focuses on.
The course concepts we find that most closely relate to The Big Short as well as the human landscape images in Southwest Florida are swapping, liquid/liquidity, trust, and moral hazard. A swap is basically described as some sort of exchange. This is closely related to liquid/liquidity which the same website defines as “the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price.” Meaning they can convert or swap an asset to something else. We also found that moral hazard and trust related to each other. Investopedia defines moral hazard as “a situation in which one party engages in risky behavior or fails to act in good faith because it knows the other party bears the economic consequences of their behavior.” This can be connected to trust because the party engaging in risky behavior trusts that the other party will deal with the consequences. They often trust themselves with their decision, which then encourages them to continue the cycle.
The images of the Human landscapes in Southwest Florida and course concepts like Swapping and Liquidity illuminate connections between The Big Short. Liquidity specifically appears in these connections through different examples. One of these examples includes all the houses in the photos having standing water between or around them. This can be interpreted literally as the definition of liquid but as well as the financial terms of liquidity. This standing water could represent the inability for investment banks to sell off their mortgage bonds they purchased that had become stagnant due to the market failures. Another example that represents liquidity is the half finished developments in the picture and its connection to the market failure or “bubble pop” in The Big Short. Developers and investment banks were both unable to liquify their assets as a result. There are many examples in The Big Short of the course concept swapping. One example being CDO’s. CDO’s are a collateralized debt obligation. In chapter 4 of The Big Short, The CDO’s are swapping their bad rated investment bonds with the few highly rated ones and sell the package off as a AAA rated bond investment. A second example of swapping in The Big Short is in chapter 2 with the multitude of banks buying and selling mortgage bonds to each other. The banks swapping these bonds cause an increase in the supply of money which relates back to liquidity. The swapping of banks buying and selling mortgage bonds also allows the banks to lend with easier terms. A third example of swapping is In the pictures in Human Landscapes in SouthWest Florida. In the pictures, you can see the homeowners normal backyards with pools being swapped to a big pond which is however out of the homeowners control.
The course concept of “trust” relates heavily to not only the Human landscapes images but also The Big Short and the documentary Inside Job. When looking at some of the Human landscape photos we noticed that there were some developments where there were one or two houses built and no more. In some developments people put a deposit down on a piece of land of a future development and they trust the developers to then build their homes. This connects really well to the big short where people trusted mortgage lenders to not screw them over with their mortgage payments. The banks did screw them over with what was called a subprime adjustable rate mortgage.A subprime mortgage is one that’s normally issued to borrowers with low credit ratings. “A prime conventional mortgage isn’t offered, because the lender views the borrower as having a greater-than-average risk of defaulting on the loan. Lending institutions often charge interest on subprime mortgages at a much higher rate than on prime mortgages to compensate for carrying more risk. These are often adjustable-rate mortgages (ARMs) as well, so the interest rate can potentially increase at specified points in time.”The Big Short also talked about how these mortgages screw people over. “Mortgage borrowers typically repaid their loans when interest rates fell and they could finance more cheaply”(7) However with the adjustable rate mortgage there was an initial two year period in which the interest rate was really low. After that two years the interest would skyrocket as debrided in the Investopedia definition of a subprime mortgage. As the quote from the Big short said most people waited for the rates to fall and with a subprime mortgage the rates went up. This basically screwed over people who intended on actually paying off their mortgage. Another example of how the course concept of “trust” relates to The Big Short and The Inside Job was what happened between the mortgage rating agencies and the banks who bought the CDOs rated by the rating agencies. In chapter four of the big short this was shown when Gene Park, an employee of AIG FP realized that they should not have trusted the rating agencies. “Confronted with the new fact—that his company was effectively long $50 billion in triple-B subprime mortgage bonds,masquerading as triple A-rated diversified piles of consumer loans.”(89) So the banks bought these triple A rated CDOs that were really trashy subprime loans. This betrayal of trust by the rating agencies was also shown in The Inside Job. Toward the end of the documentary there was a scene in which the rating agencies were testifying in front of congress about their false ratings. The heads of the rating agencies basically said that all of our ratings are opinions and not facts. However the true ratings of these loans were facts and not opinions. This really shows just how untrustworthy these agencies were. As a result of this many large banks went bankrupt and were closed. Trust was a huge reason why the whole housing crisis and stock market crash happened in the first place.
The course concept of “moral hazard” is another concept that relates heavily to the Human landscapes, The Big Short and The Inside Job. Investopedia defines moral hazard as “a situation in which one party engages in risky behavior or fails to act in good faith because it knows the other party bears the economic consequences of their behavior.” Some of the images in the Human Landscapes collection showed houses that were extremely close to the water. The reason this is a problem is because Florida gets hurricanes in which lot’s of flooding takes place. The developers that planned the housing developments out probably knew this and still kept these risky designs because they knew it wouldn’t affect them. Unfortunately for the people who bought these houses have to bear the financial burden on these risky designs if their houses are ever flooded. The people who paid for waterfront homes get screwed if there is a water related natural disaster and the developers walk away scot-free with all of the money that they made from developing all of these homes. The concept of moral hazard also came up in The Big Short. The CDO rating agencies were persuaded to put false ratings on these horrible piles of loans. They did all of this while knowing that they wouldn’t be hurt financially in any way. “Having gathered 100 ground floors from 100 different subprime mortgage buildings (100 different triple-B rated bonds), they persuaded the rating agencies that these weren’t, as they might appear, all exactly the same things.”(73) The subprime mortgage lending agencies needed to sell these bonds to make the money they wanted so they basically fooled the big banks by working with the rating agencies. So moral hazard applies to both the rating agencies and the subprime mortgage lenders because they knew that these were risky loans but they tricked the big banks into buying them anyway knowing that they wouldn’t feel the financial pain that the big banks were going to feel. Moral hazard also related to The Inside Job. The scene discussed earlier in the trust section is the one that moral hazard relates the most to. The rating agencies testified before congress and said that their ratings were just opinions and not fact. However this was their way of avoiding the financial hurt that the big banks experienced. They knew that the CDO’s were bad, they just knew they could make money without consequence even if they were caught. Moral hazard took a big part in this crisis. If moral hazard hadn’t taken place then there’s a decent chance that the whole crisis could have been avoided.
These connections are important because they lend the crises a more relevant and genuine feel. You can witness how bankers and investors built a system that was destined to fail while still turning a profit in The Big Short. However, the images of the landscapes in Florida capture what actually transpired on the ground. It’s simple to read about financial concepts like “credit default swaps” and “subprime mortgages” without truly comprehending the implications of individuals. Photographs of deserted neighborhoods make it abundantly evident that this crisis was about more than simply money; it was about people’s lives. Ultimately, both pieces serve as a reminder that those who can least afford to pay the price are typically the ones who do so when the system is centered solely on profit and ignores long term consequences. Combined, the pictures and narratives provide a message: actual people and communities are left to pick up the pieces behind statistics regarding lost employment and foreclosed homes.