Shorting and the Risks it Presents

The amount of gears that rotate when dealing with the financial crisis of 2008 is unimaginable.  One of the most important aspects that light has been shed on if the aspect of shorting an asset, or short selling a house.  This is one of the aspects that the Turner family considers in the novel The Turner House by Angela Flournoy when dealing with the housing crisis in 2008 that caused them to lose the thirteen Turner siblings grew up in.  this is one of the aspects of The Big Short did not make clear when addressing.  Michael Burry is one of the key people when thinking about the housing crisis of 2008, he had predicted two years prior that the subprime mortgage bonds that banks were handing out were bound to fail.  This aspect can be seen in respect of the Turner family in the way that they lost their house.  The twelfth of the turner children, Troy, considers short selling the house to his current girlfriend Jillian.  Short selling, according to Investopedia’s online dictionary, is an investment in which one believes will decline and will sell that asset and then proceed to buy it back at a lower price than what it was sold for.  The issue with short selling is that there is an incredible amount of uncertainty in which that value will continue to decrease or raise again.  The Turner House clears up the risk vs reward aspect of short selling in the 2008 housing and financial crisis as The Big Short focuses on bigger aspects of the crisis instead of what was happening to individual families such as the Turners. 

            Short selling any asset is risky business and should only be used by investors or traders who are experienced and pay careful attention to the markets that they are attempting to short sell in.  One of the main problems with short selling is that people may try and predict where the market will go, but the market is unpredictable and can go anywhere any day.  One place where short selling is visible is within The Big Short, Michael Lewis describes how Greg Lippmann had his, “noble army of short sellers betting against the loans” (Lewis 227).  After Michael Burry persuaded Wall Street brokers to allow credit default swaps for mortgages it allowed for the banks to pursue short selling.  A credit default swap is basically insurance on a company, if one believes that a company would default, they would be against them and in return when they would default, they would see a return earning of more than what they had originally gambled when betting on the market.  This allowed Michael Burry to begin shorting mortgages because he was predicating looking at the way the banks set up these unfair mortgages, they were all bound to fail.  Steve Eisman is another former businessman involved in shorting and short selling mortgages during the 2008 housing crisis.  He had predicted that he would make a great sum of money when being able to short the stocks in companies that were giving out subprime mortgages: “The very first day we said ‘There is going to come a time when we’re going to make a fortune shorting this stuff.  It’s going to blow up.  We just don’t know how or when’” (Lewis 24).  Eisman was able to predict the way in which these subprime mortgage companies allowed him to short the stock and sell it just before the company began to fail.  Burry put his money into subprime mortgage lending companies that had not made enough of them to go bankrupt when the market was to come crashing down.  The crash happened and it left families like the Turners in a particular position of having to figure out where they would get enough money to pay for the house that was sold to them when their interest rates shot through the roof.  One of their options, short selling the house in which they grew up.

            Short selling for a family in the position of the Turners is a much different risk than short selling stocks in a company like Michael Burry and Steve Eisman were picking up on.  For the Turners it’s a matter of saving the house that all thirteen kids were raised in at some point in their life; they all have a connection to the house.  Troy, one of the youngest of the Turner children, has taken to the idea of short selling the house to his girlfriend Jillian since she is not connected to his family on paper at all.  They would be able to sell the house to Jillian for a low price and then the Turners would be able to purchase it: “He and his girlfriend Jillian might not have the $40,000 needed to absolve Viola of her debt, but they had enough to buy the house for the price any interested stranger would be expected to pay” (Flournoy 64).  Troy here is thinking about a possible way to save his family’s house.  This issue is that his family does not trust the relationship that him and Jillian have, as a result it would be difficult to convince them to sell it to her.  The uncertainty in this situation is if Troy and Jillian broke up, she would legally have possession of their house.  Troy is so desperate to keep the house he is even willing to undergo fraud to be able to short sell it.  He has a friend David who is able to help him in terms of forging paperwork.  The risk of this is that Troy can potentially lose his job and get put in jail because what he is planning on doing at this point in the story is illegal.  David describes the risk of possibly getting caught by describing what had happened to a colleague he knew who had gotten caught saying, “The feds brought the guy up on fraud charges, and my friend had to testify in in front of a grand jury” (Flournoy 65).  He continues to talk about how his friend was subpoenaed and had to get all of his records for the court.  This is just the beginning of the process Troy would have to undergo if he was to get caught.  The risk of being able to short sell the house for Troy is much different than the risk for Eisman and Burry.  If Troy gets caught it would ruin his life; if Burry and Eisman got caught they’d just be betting against housing mortgages that had the possibility to fail on them, but they knew that it would work out in their favor.

            This defined a generation of house buyers as many of them were set up to fail right from the onset of receiving their mortgages.  This affected everyone in the United States; the market crashed because bankers were signing triple-A loans to people they knew would not be able to pay it back and then made money betting that they would fail.  The lack of regulation made it so none of the main bankers and brokers who were doing this got in trouble.  There was one arrest, and in the end, it was dismissed.  The entirety of the United States population of people who own houses should care about the fact that the 2008 housing crisis happened.  It should now be known to homeowners that subprime mortgages must be read carefully; they may say an interest rate is going to be 7% but if a buyer is not looking for it in the contract after two years it would skyrocket.  The banking industry was filled with sleezy people who were willing to lie to their customers in order to better themselves. 

            The Turner House provides clear look into a struggling family during the 2008 financial crisis.  The view from The Big Short shows the inside wheels that were turning during it and identifies important characters and the roles they played in the crisis.  Michael Burry is an example of this with how he convinced Wall Street brokers to allow credit default swaps on mortgages because he realized what was going to happen with the housing market.  Troy as a character demonstrates the risks people who had invested and received houses were willing to go to attempt to stay in their house.  Troy, like many others, is attempting to cheat a system that already cheated him.  The issue is the risk vs reward of short selling the Turner family house.  This was a position a large majority of people who owned houses in America during this time faced due to the selfishness of the banking and stock market and The Turner House provides a fictional first-hand account of a family that was struggling at the same time The Big Short is in progress.

King Lear’s Warning

“King Lear”, by William Shakespeare, allows the audience to see swapping and liquidity throughout the play and can translate it into how it can stand as warning for future generations based off the actions of the characters.  The play is filled with swapping, which is the idea of a character changing roles as another along with the swapping of power.  According to a swap in terms of finance is, “a derivative contract through which two parties exchange the cash flows or liabilities from two different financial instruments.”  Liquidity on the other hand, still according to, is how fast an asset can be converted to cash.  This is evident throughout “King Lear” as many of the characters abuse assets that they have for power and wealth.  Connected to these two ideas of swapping and liquidity is expulsion.  Swapping and expulsion can be seen in the form of Edmunds plot to rid himself of Edgar and Gloucester and take his family name along with their wealth.  Liquidity and expulsion is evident in the characters of Goneril and Regan when they abuse their father’s instilment of power, and choose to expel him from his own home; one of their biggest assets thrown out after they receive their wealth.  Although King Lear is written in the early seventeenth century, there are lessons within that can be applied to the housing crisis in 2008. The biggest one being power needs regulation.  People in powerful positions can have a deceitful nature in which they hide that they are only out for themselves.

            Edmund makes it his goal to expel Edgar and Gloucester from their family so he can get all of the power.  He does this through swapping positions of power throughout the play.  Edmund is able to first convince his brother, Edgar, that his father, Gloucester, is mad at him and trying to kill him, while at the same time convinces his father that Edgar is attempting to kill him for his money.  This is evident when Edmund shows Gloucester a letter, he forged saying his brother Edgar is plotting to kill him; Gloucester reacts by saying, “Conspiracy? ‘Sleep till I wake him, you should enjoy half his revenue.’ My son Edgar, had he a hand to write to write this? A heart and brain to breed it in?” (Shakespeare 27).  Edmund is successfully able to deceive his father into thinking Edgar is attempting to kill him, and in doing so swaps positions of power with Edgar who was previously in line to inherit majority of his father’s fortune.  By setting these two characters against each other Edmund is successfully able to expel Edgar from his family, ensuring once Gloucester is gone, he will have all the power.  A second act of swapping comes when Edmund betrays Gloucester and gets him expelled as King Lear was.  Gloucester chooses to help his longtime companion, King Lear, who has previously marched out into a severe storm.  Gloucester puts his trust in Edmund when he tells him he is going after Lear, to which Edmund immediately sells him out and he is expelled as King Lear had been: “If I find him comforting the King, it will stuff his suspicion more fully.  I will preserve in my course of loyalty, though the conflict be sore between that and my blood” (117).  Edmund plots against Gloucester and plans to catch him helping Lear in order to expel him.  In this moment Edmunds goal has been completed showing the total swapping of power from his father’s power to himself. 

            Goneril and Regan’s relationship with their father, King Lear, shows the abuse of liquidity.  King Lear was one of Goneril and Regan’s assets but once he handed them power, they showed that the asset that was allowing them to live was no longer needed and decided to expel their father from their homes.  This is first evident when King Lear decides that his hundred men and himself will stay with Goneril.  After a short amount of time Goneril gets upset with her father and servant’s rowdy behavior and demands Lear expels fifty of his men.  Lear’s reaction is to go to his other daughter, Regan’s house: “I have another daughter, / Who I am sure is kind and comfortable” (51).  In this moment Lear shows he will be going to Regan’s, but they all convene at Gloucester’s castle.  Goneril used the liquidity she gained from her father’s power to expel him.  Regan receives a letter from Goneril before Lear arrives describing their father’s behavior which immediately makes Regan know that she will be expelling Lear as well; Goneril also travels to Gloucester’s castle.  When Lear arrives, he proves Goneril’s letter to be true and Regan asks him to give up his men saying, “I dare avouch it, sir.  What, fifty followers?  Is it not well?  What should you need of more?” (91).  In this moment Regan uses the liquidity her father gave her and puts a cap on the amount of men he is allowed to have.  This liquidly comes in the form of power over her father and eventually leads to his follower’s expulsion.  He then begins to ask to stay with Goneril again to which she says he must give up all his men.  Lear quickly turns back to Regan’s offer, but she now also says he is to have no men if he stays.  In a fit of rage, he leaves Regan’s castle entering a storm.  They choose to expel Lear’s followers with their power along with anyone who attempts to help him.  Regan shows this when she says, “For his particular, I’ll receive him gladly but not one follower” (94).  She uses asset she gains from the liquidity her father gave her to expel his followers.  This shows how there can be corruption within people in power positions in thinking about their personal gain.

            The two ideas of swapping and liquidity in “King Lear” could have very well served as a warning in the housing crisis in 2008.  People with power need regulation or they are prone to use it for personal gain when they are supposed to be helping others.  In the housing crisis this was the case with companies, while the people they were supposed to be helping struggled they gave out millions of dollars in bonuses to themselves; they were living lavish and letting the people who needed help after Hurricane Katrina.  In the show, The Old Man and the Storm, it documents Mr. Herbert Gettridge, an 82-year-old man who fixed his house after Katrina struck New Orleans.  He recalls at one point the abundant amount of paperwork he was forced to fill out, to which he still had to wait to get his insurance money to continue building.  While this was occurring to Mr. Gettridge and countless more, the corporations that were supposed to be helping them were using the money for themselves.  This is apparent in the movie Inside Job when describing the lifestyles and paychecks of corporation heads.  While Mr. Gettridge struggles, they abuse the power they have without any regulation.  Money is the liquidity, and the corporations were taking their assets and turning them into their bonuses, when it wasn’t meant for them.  Once Katrina struck, people in the position of Mr. Gettridge weren’t able to get money for months because it was being given out as bonuses.  Swapping is less evident in, Inside Job.  What should have been happening between the big corporations and the people in Mr. Gettridge’s position is giving back money instead of being deceitful.  They should have been reimbursed after losing their house, a financial security.

            “King Lear” could have served as a warning for the housing crisis in 2008.  It is shown through Edmund that people have a deceitful nature.  His scheme is to gain more power and wealth for himself, this is evident in the housing crisis in the actions of corporate workers.  These types of actions lead to expulsion, Edmund when he is killed, and the employees of corporations like Lehman Brothers losing all their jobs all their jobs when it went bankrupt.  Both Edmund and the employees seek personal gain at another’s expense.  The actions of Goneril and Regan could also serve warning that power without having regulation can be abused.  Though Lear’s request was unreasonable to have his daughters house himself and a hundred of his men, it allowed Regan and Goneril to abuse their power and take all of them away from him.  Without regulation in the housing crisis it allowed for corporate owners in power to deceive the public for their own personal gain.

            The play, “King Lear” addresses ideas that still occur in today’s age.  Edmunds deceitful nature is evident in the cooperate owner who committed fraud only to better off themselves.  If Goneril and Regan’s abuse of power was regulated, then they would not be able to expel Lear.  When there was no regulation in the housing crisis people used their power for personal gain to get what they want, like Goneril and Regan.  Edmund’s successful attempt to swap power ultimately lead to his brother’s expulsion.  Goneril and Regan used the liquidity they gained from their father to expel him and his men.  Both swapping and liquidity led to the expulsion of characters and families in they play and could have been used as a warning to prevent corporate deception in 2008.