Calling in Hollywood to decipher complex finance

A decade ago, I would sometimes lie in bed at night wondering how to make credit derivatives sound exciting. The reason? Back then, I was running the capital markets team for the ‘Financial Times’, and was alarmed by the bubble brewing in complex finance.

I knew, though, that the instruments at the centre of this bubble, such as collateralised debt obligations (or CDOs), sounded like gobbledegook to most people. How, I wondered, could I ever talk about those “geeky” CDOs in a compelling way, so that readers did not just avert their eyes with boredom?

Now, years later, I finally have an answer: introduce celebrities into that CDO mix; Selena Gomez, Anthony Bourdain, Brad Pitt and Matt Damon. I attended a premiere in New York of ‘The Big Short’, a film based on Michael Lewis’s bestselling book. It tells the story of the 2008 financial crisis through the eyes of some of the traders who spotted the bubble — and bet against those CDOs to make a killing.

As pieces of financial history go, The Big Short is not perfect. The narrative focuses on a few scrappy maverick investors but ignores some bigger fish (such as the hedge fund player John Paulson). It also turns everyone into villains or underdog heroes, ignoring the inevitable shades of grey. But, to my mind, those faults are more than offset by one crowning achievement: the movie finds a way to make CDOs sound (almost) interesting, even to people who are not as geeky as me.

It does that partly by telling the human stories of those who were trading the credit and mortgage bubble and bust. But it also does something else: whenever the saga gets too technical, a celebrity is pulled into the action to “explain” directly to camera, in the manner of a Greek chorus or Shakespearean narrator, how finance works.

Thus we have Anthony Bourdain, the famous chef, standing in a kitchen, describing how a CDO is similar to fish stew (bankers resold old mortgages by mixing them up into fresh broth, just as chefs conceal old fish by turning it into soup). We also see the actress Selena Gomez elaborating the principles of synthetic derivatives while sitting in a casino, placing chips on a table, as groupies mimic her bets.

Yes, this technique is artificial and some people at the premiere I attended disliked the interruptions. But the key point is this: somebody in Hollywood is at least trying to find ways to demystify complexity and wage war on “dull”, using whatever tricks are available.

This is an endeavour that our 21st-century world desperately needs to see more of, and not just in relation to finance. For one of the biggest scourges of the modern age is that our societies depend deeply on what experts are doing with all manner of complex technology, be that in finance, science or other domains.

The more dependent we all become on these specialist areas (and the more vulnerable to mishaps in them), the less that ordinary mortals appear able to understand them, or politicians keep them under control.

Sometimes that is because of deliberate strategies of concealment, fraud or wrongdoing. But more often than not the key problem is something else: we tend to label those specialist areas as “nerdy” or “dull” — and that causes us to avert our eyes, leaving power in the hands of the technocrats. That is bad for society, since a lack of oversight inevitably leads to excess. But it is bad for the technocrats as well, since a lack of outside challenge tends to result in a loss of common sense.

As I left the film premiere, the question that haunted me was how many other areas of life might also benefit from the Hollywood treatment, or the sight of a pouting Gomez talking to camera to decode geeky ideas. These days, the big risks to finance are no longer found in subprime mortgage CDOs.

But there are some parts of modern money flows in which strange things are occurring as a result of quantitative easing (exchange traded funds, or ETFs, and tri-party repo, to name a couple).

Outside finance, there are numerous sectors where problems are being hidden in plain sight, concealed by virtue of seeming “boring” (think of what is happening in the deeper reaches of the internet, antibiotic research, water resources and so on).

So could Bourdain or Pitt make us fascinated by ETFs? Or the issues around fiscal policy or climate change? I know it is hard to imagine. But then again, Michael Lewis admits that when he heard that people such as Matt Damon planned to co-produce The Big Short, his first reaction was, “Who’d make a movie about credit default swaps?”

Who knows? If The Big Short does well, maybe Damon and his Hollywood cohort will flex their geeky muscles even further. At least, I would love to hope so.

Financial Times