‘Big Short’ Movie

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 traderJared Vennett, a fictionalized version of Deutsche Bank trader Greg Lippmann played byRyan 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.

If there were an Oscar for best dramatization of a derivative, it would surely go to behavioral economist Richard Thaler and singer Selena Gomez, playing themselves, at a blackjack table. The crowd lays bets on Gomez’s hand, then on each other’s bets. It’s just like a “synthetic CDO”—a derivative priced off complex mortgage securities that itself contains no mortgages.

A central question hovering over the movie is what motivated the Wall Street establishment against whom the traders are betting: stupidity or criminality? Says Mr. Vennett: “Tell me the difference between stupid and legal and I’ll have my wife’s brother arrested.”

The movie, ultimately, sides with criminality. Mr. McKay says that some bankers were clearly stupid, but that isn’t an excuse. “ Tony Soprano’s model is not a good business model. He’s stupid. But he’s a criminal.”

Such moral clarity will resonate with a public still sickened over the crisis-era bailouts. But it is also simplistic.

The idea that mortgage-industry insiders systematically profited by selling mortgages they knew would fail is at odds with what actually happened. A 2012 paper by three Federal Reserve economists noted insiders such as Bear Stearns and its executives had their wealth and their companies tied up in the mortgage market. It was their losses “that nearly brought down the financial system in late 2008.” It was outsiders, such as hedge-fund manager Michael Burry (played in the movie by Christian Bale) and John Paulson, another hedge-fund manager not profiled in “The Big Short,” who made a killing.

Trader Mark Baum (played by Steve Carell) concludes the banks knew what they were doing but assumed they would be bailed out. This is a strange sort of logic: What bank would knowingly make itself a candidate for a bailout, by which point shareholders are often largely wiped out and management fired?

In fact, as the Fed paper notes, insiders took on so much exposure because they, like most home buyers, thought housing prices would never go down. This is also why underwriting standards collapsed: Proof of income didn’t matter if the loan could always be repaid by selling off the appreciated collateral.

The movie nods to this at times. “No one can see a bubble,” an investor tells Mr. Burry. “That’s what makes it a bubble.”

But it never answers the bigger question: how the bubble, and the belief it would never collapse, formed. The reason lies in broader macroeconomic and societal forces that are barely mentioned: low interest rates engineered by the Fed after the Nasdaq bubble’s collapse; the glut of foreign savings from China and elsewhere pouring into the U.S. bond market; the complacency nurtured by years of economic calm; the financial innovations—well beyond mortgages—and lax regulatory standards bred by that calm. These forces were global: Many countries had housing bubbles and bank bailouts.

Perhaps no movie could do justice to all those questions. There is “only so much you can do” in a two-hour movie, Mr. McKay says. “I’d love it if this movie gave a kick in the pants to the conversation about the economy and finance, the collapse, and regulation, and made people a little less intimidated by the subject.”

Corrections & Amplifications: 
Margot Robbie is an actress. An earlier version of this article misidentified her.

Write to Greg Ip at greg.ip@wsj.com