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Personal Finance :: What the ‘Big Short’ Movie Gets Right—and Wrong—About the Financial Crisis

The global financial crisis has inspired hundreds of books, but only a handful of movies. It’s hard to make mortgages telegenic.

“The Big Short” hopes to change that. Based on Michael Lewis’s best-selling book by the same name, it tells the story of a handful of traders who made a fortune betting against the mortgages behind the housing bubble.

Director Adam McKay is better known for making comedies. “The Other Guys,” a 2010 action comedy he directed that revolves around a financial fraud, piqued his interest in finance, and led him to Mr. Lewis’s books. When he landed the “The Big Short,” he immersed himself in books and articles about the crisis and visited a bond-trading company.

“I feel there’s a giant gap between the professionals and experts, and average people” when it comes to finance, he says. “Average people feel they’re too dumb, or banking is boring.”

His movie goes a long way toward narrowing that gap. Viewers get an entertaining lesson in the financial engineering behind the mortgage bubble, such as how mortgage-backed securities are constructed and how vulnerable they were to default.

But it is an incomplete picture. By dwelling so intensively on mortgage finance, “The Big Short” underplays the more complex economic forces that produced the bubble and intensified the crisis. By laying the bulk of the blame on Wall Street venality, it brushes off less nefarious but more compelling reasons why so many on and off Wall Street didn’t see it coming.

The movie, which opens in limited theaters Dec. 11 and more broadly on Dec. 23, begins by depicting how in the 1970s Lewis Ranieri of Salomon Brothers began packaging mortgage loans into mortgage-backed securities. The MBS was “simple and valuable,” but it “mutated into a monstrosity that collapsed the world’s economy,” declares trader Jared Vennett, a fictionalized version of Deutsche Bank trader Greg Lippmann played by Ryan Gosling.

By the 2000s, billions of dollars in subprime loans made to customers with low credit scores, no verified income and low “teaser” rates that adjusted upward after just a few years were being packaged into MBS. In 2005, a handful of traders who examined the actual mortgages and homes backing the securities concluded they were far likelier to default than the triple-A-ratings implied. So they devised tools for betting against—i.e. “shorting”—them.

There is a lot of dry finance at work, which is why it was ignored for so long. Mr. McKay finds clever ways to explain it: actress Margot Robbie in a bubble bath describes why banks began filling MBS with riskier mortgages. Mr. Vennett explains how securities are sliced into “tranches” with a tower of toy Jenga blocks.

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