The Big Short: is the next financial crisis on its way?

Patrick Collinson in The Guardian

In the Oscar-winning The Big Short, Steve Carell plays the angry Wall Street outsider who predicts (and hugely profits from) the great financial crash of 2007-08. He sees sub-prime mortgages rated triple-A but which, in reality, are junk – and bets billions against the banks holding them. In real life he is Steve Eisman, he is still on Wall Street, and he is still shorting stocks he thinks are going to plummet. And while he’s tight-lipped about which ones (unless you have $1m to spare for him to manage) it is evident he has one major target in mind: continental Europe’s banks – and Italy’s are probably the worst.

Why Italy? Because, he says, the banks there are stuffed with “non-performing loans” (NPLs). That’s jargon for loans handed out to companies and households where the borrower has fallen behind with repayments, or is barely paying at all. But the Italian banks have not written off these loans as duds, he says. Instead, billions upon billions are still on the books, written down as worth about 45% to 50% of their original value.

The big problem, says Eisman, is that they are not worth anywhere near that much. In The Big Short, Eisman’s staff head to Florida to speak to the owners of newly built homes bundled up in “mortgage-backed securities” rated as AAA by the investment banks. What they find are strippers with loans against multiple homes but almost no income, the mortgages arranged by sharp-suited brokers who know they won’t be repaid, and don’t care. Visiting the housing estates that these triple-A mortgages are secured against, they find foreclosures and dereliction.


What is very negative is that in every country in Europe, the largest owner of sovereign bonds are that country’s banks


In a mix of moral outrage at the banks – and investing acumen – Eisman and his colleagues bought as many “swaps” as possible to profit from the inevitable collapse of the mortgage-backed securities, making a $1bn profit along the way.

This time around, Eisman is not padding around the plains of Lombardy because he says the evidence is in plain sight. When financiers look to buy the NPLs off the Italian banks, they value the loans at what they are really worth – in other words, how many of the holders are really able to repay, and how much money will be recovered. What they find is that the NPLs should be valued at just 20% of their original price. Trouble is, if the Italian banks recognise their loans at their true value, it wipes out their capital, and they go bust overnight.

“Europe is screwed. You guys are still screwed,” says Eisman. “In the Italian system, the banks say they are worth 45-50 cents in the dollar. But the bid price is 20 cents. If they were to mark them down, they would be insolvent.”

Eisman is careful not to name any specific Italian bank. But fears about the solvency of the system – weighed down by an estimated €360bn in bad debts – are not new. In official “stress tests” of 51 major European banks in July by the European Banking Authority, Italy’s third largest bank, Banca Monte dei Paschi di Siena, emerged as the weakest. It triggered a rescue package – and soothing words from Italy’s finance minister, who said there was no generalised crisis in the banking system. But MPPS’s share price remains at just 25 cents, down more than 90% from two years ago.

How worried should British bank account (and shareholders) be? “I’m not really worried about England’s banks,” says Eisman. “They are in better shape than most in Europe.” When it comes to the US, Eisman’s outrage, so central to the plot of The Big Short, has melted away (just don’t start him on Household Finance Corporation, the HSBC-owned lender at the heart of sub-prime crisis). “I think the regulators did a horrendous, just horrendous job pre-crisis. But under the Fed, the banks have been enormously deleveraged and de-risked. There are no sub-prime mortgages any more... the European regulators have been much more lenient than the US regulators.”

Eisman was of the view that US banks were rather boring as an investment – although Donald Trump’s victory has changed that. “I have a feeling there could be a softening in the Department of Labor rules (an Obama-led crackdown on how banks sell financial products) and the regulatory environment has now changed in favour of the banks.”

 Steve Eisman: ‘I’m not really worried about England’s banks. They are in better shape than most in Europe.’ Photograph: Bloomberg via Getty Images

Trump’s victory has sent the bond markets into disarray, with the yield on government bonds rising steeply. While this sounds good for savers – interest rates could rise – it is bad news for the holders of government bonds, which fall in value when the yield rises. Eisman sees that as another woe for Europe’s banks, who hold vast amounts of “sovereign bonds”.

“What is very negative is that in every country in Europe, the largest owner of that country’s sovereign bonds are that country’s banks,” he says. As the bonds decline in value, then the capital base of the banks deteriorates.

He doesn’t share the optimism around Deutsche Bank since Trump’s victory. The troubled German bank, facing a $14bn fine in the US for mortgage bond mis-selling, was for a long time one of the biggest lenders to the Trump business empire. In the three days after Trump’s victory, shares in Deutsche Bank, regarded as Europe’s most systemically important bank, jumped by a fifth from €12.90 to €15.30 as traders bet on Trump-inspired leniency over the fine.

But Eisman doesn’t buy it. By his reckoning, Deutsche Bank was less fundamentally profitable than its rivals, and relied more on leverage to boost earnings. His analysis suggests it will struggle to return to its former profitability.

Critics will point out that shorting the likes of Banca Monte dei Paschi di Siena or Deutsche Bank sounds fine – except that the share price of both have already fallen so dramatically the bad news is already in the price. But we don’t know for sure if they are Eisman’s precise targets – because he’s not willing to say unless you give him at least $1m to manage in one of his “personal accounts”.

Eisman now effectively runs his own “boutique” operation within a bigger Wall Street firm, Neuberger Berman. His “Eisman Long/Short SMA” account has opened to wealthy investors, and in January he will be in London drumming up interest among investors.

But not everything Eisman touches turns to gold. He declines to say how much he made during the financial crash, when he was manager of funds at FrontPoint Financial Services, though it was reportedly as much as $1bn. But in 2010 FrontPoint ran into trouble after one of its manager pleaded guilty to insider trading and was given a five-year prison sentence.

Eisman later set up a hedge fund, Emrys Partners, gathering nearly $200m from investors, but its returns were relatively humdrum compared to the drama of the great crash, making 3.6% in 2012 and 10.8% in 2013, according to the Wall Street Journal.

Did he think the film accurately portrayed what went on? He visited the set, and gave Carell and the other actors (Brad Pitt and Christian Bale also starred) advice and notes.

“When I saw the film, I thought it was great and that Steve Carell was wonderful. But I thought, hey, I wasn’t that angry. After the crash I was interviewed by the Federal Crisis Inquiry Commission, and I saw a transcription later on. After reading it, I realised that ‘yes’, I really was that angry... but the Fed has done a very good job since.”

Susan Smith complains after judges ordered her four-year-old to stop wearing girls’ clothes

Ashifa Kassam in The Guardian

A Canadian mother has called for lawyers and judges to receive better training on gender identity after two judges in the province of Alberta ordered her four-year-old child to stop wearing girls’ clothing in public.

The order was first issued last year by a family court judge in Medicine Hat, a small city of 63,000. Some three months later, the clothing restriction was upheld by a second judge.

Susan Smith said her child was born male but began identifying as a girl soon after turning two years old. “First I thought it was really cute. It was like ‘oh no no honey, you’re a boy,” said Smith, whose name has been changed in order to protect the child.

But her child only became increasingly insistent. Smith, who is separated from the child’s father but shares custody, struggled with how to respond. “I was kind of questioning, is my kid doing this for attention? What is going on?”

Then one evening, after her child surprised her by asking when their penis would fall off, Smith sat the child down. “I told them sweetheart, you were born with a penis, so you’re a boy. You will always have your penis, therefore you’ll always be a boy.”

A few nights later her child woke her up, visibly upset. “It was along the lines of mom, I don’t want to be a boy,” said Smith. “And then it went to almost shouting. I’m going to cut my penis off, I want my penis off.”

Trans children allowed to express identity 'have good mental health'


Concerned for the safety of the child, she sought professional help and began researching gender dysphoria, a condition that causes a person to experience extreme distress because of a disconnect between their birth sex and gender identity.

Soon after, Smith decided she would acknowledge the child’s choice of gender identity. “I was going to do whatever I could to validate and support them and to be that one person they could go to,” Smith said.

After conferring with the staff and children at her child’s preschool and daycare, she began offering her child the option of wearing either male, female or gender neutral clothing. Her child consistently chose stereotypically female clothing and opted to go by a female name, she said.

According to Smith, her child’s confidence bloomed, while the yelling, screaming and unhappiness disappeared. “Everything was perfect,” she said.

Throughout the process, Smith had kept the father informed. But about one month after she began allowing her child to choose their clothing, Smith was served court documents. The father – who Smith said blamed her for the child’s anxiety and confusion around gender – was seeking full custody of the child.

The first interim order, issued in December 2015, said Smith could continue as the primary caregiver. But the judge said the child would not be permitted to wear clearly female clothing in public. The child could choose to do so in private, the order said.

The ruling came as a shock to Smith. “I’m the person that knows this kid more than anybody in this world,” she said. “It’s like telling your kid who has a huge thing for being Spiderman – and that was allowed to have a Spiderman backpack, a Spiderman shirt, a Spiderman pencil and a Spiderman cup – and all of a sudden you come along and you take all of that away. And you give them a Batman cup.”

In February, a second judge upheld the ruling, and also granted the father primary custody of the child, with Smith allowed limited access.

In September, a third provincial judge overturned the clothing restriction after consulting with a parenting expert. The child, said the judge, must now be provided with male and female clothing options and then can choose from these options.

Smith said the consecutive orders – all issued within a nine-month span – have taken a toll on the child, who is now five. “When my child was removed and placed with Dad, they internalised it and took it like they did something wrong. They were being bad because the judge doesn’t like them to be a girl.”

She plans to file a judicial complaint with the province, demanding that all legal representatives in Alberta – from judges to lawyers – be better trained on gender identity. “If they were properly educated and aware of the severe consequences and the turmoil this has had on my child, they could not ethically say it’s in the best interests of the child.”

Ron Hewitt, the executive director of Alberta’s provincial court system, said judges study and refer to a number of sources of information to keep current on the law and other matters that apply to their role as judges. “Our court carries on extensive professional development for the judges of the court in all areas as appropriate,” he said.

Transgender children: the parents and doctors on the frontline

While Alberta’s justice minister, Kathleen Ganley, could not comment on the specifics of the case, she pointed to an amendment made last autumn to the province’s Human Rights Act, which saw gender identity and gender expression added as prohibited grounds of discrimination. “This is now law, and we expect all Albertans to follow the law,” she said in a statement.

Smith said her complaint – and the remedy she’s demanding – will do little to help her in her ongoing court battle to regain custody of her child. But she hopes it will prevent other families from experiencing what she and her child have been through in the past year. “This has been so hard on my kid,” she said, her voice shaking as she fought back tears.

“My kid then started talking about dying. At four, they didn’t feel that the world wanted them to be a girl. That they were no good,” she said. “My kid was asking me, mom, does it hurt to die, how can I die, where would I go when I die? Mom now that you know, when I die, grow me in your belly but grow me as a girl, not with a penis. Because now you know.”

Empowerment - How Trump and Modi get their support

Irfan Husain in The Dawn

SO here we are again, scratching our heads over how everybody got the US elections so wrong, and pondering a future with a narcissistic joker like Donald Trump as the commander-in-chief of the most powerful military on the globe. My early reaction was: stop the world, I want to get off!

But on reflection, we’ve been here before. This is not the first time a rabble-rousing populist has clawed his way to the top. Remember Hitler? He, too, was elected because his message of anti-Semitism and nationalism resonated with Germans who were being squeezed by sanctions imposed by the victorious Allies after the First World War.

Closer to home, we have seen the rise of Altaf Hussain to utter dominion over a liberal, cosmopolitan city like Karachi. He may now be in decline, but for nearly three decades, he wielded more power than most politicians in Pakistan have. He could shut down the city with a word, and allegedly have opponents liquidated with a mere nod.

Many of us in Karachi wondered at this hold he had over his followers. Thousands sat on roads in the blazing sun while he regaled them with bizarre, scarcely comprehensible rants from London while clearly under the influence. For rational, sensible Pakistanis, the whole MQM phenomenon passed all understanding.

The wave of support for Imran Khan is another example of apparently irrational group-think. Why should thousands of educated people camp out in Islamabad for months over allegations of rigging that have been dismissed by the election commission as well as the courts? Why this blind faith in Imran Khan?

Why this blind faith in demagogues?

The reason for failing to comprehend this seemingly illogical behaviour is, I suspect, rooted in our inability to grasp that motives other than logic often drive people. In Trump’s case, he appealed to people not because they necessarily believe that he will bring jobs back, or rid America of Muslims and Mexicans. What resonates is the feeling of empowerment ordinary Americans think they have gained by kicking the liberal elites out of power.

Supercilious and superior, educated, well-heeled types made little attempt to tap into the rage and the angst felt by millions of insecure Americans who felt threatened in a number of ways: unemployment, a demographic shift that will soon reduce white Americans to a minority, and the increasing economic and political power of women. So while there might be nothing rational about a desire to take America back to the 1950s when wages rose and whites were unchallenged, many Trump supporters equated his campaign with a rosy, almost utopian vision of their country.

Similar sentiments were on display during the Brexit campaign in the UK. The Leave supporters insisted they wanted to ‘get control’ of their country. Whatever the economic arguments made by both sides, the driving force behind Brexit had little to do with the promise of prosperity, and more to do with returning the country to an era that had few foreigners.

The MQM phenomenon was about Mohajir identity and empowerment. While the prospect of government jobs was a powerful incentive, the movement was basically driven by a search for pride and dignity. We missed this because we were part of an entitled elite living in our own cocoon.

In our rationality and our complacency, we misread how important they really are to people who have little sense of self-worth. So when a demagogue comes around and channels these elements into a powerful movement that challenges the status quo, we are totally blindsided.

One thing these random examples have in common is that they are all part of a post-truth politics where a demagogue can tell any number of lies without being penalised by voters. The American media, including fact-checking websites, listed the semi-truths and outright lies Trump frequently deployed in his speeches and debates. But for true believers, they were irrelevant to the overall message of redemption and hope.

When truth loses relevance in political debate, it is next to impossible for rational liberals to win. If your opponent can make up whatever he likes to prove his point, either you descend to his level of dishonesty and lose credibility with your constituency, or stick to the truth and lose the argument.

This narrative composed of rumours and fabricated figures rules supreme on 24/7 TV chat shows and the internet. Panellists and bloggers can peddle the most outlandish conspiracy theories and accusations without being questioned. False stories can be planted with ease and go viral. Ill-informed and gullible voters are easily swayed by spin doctors.

So what does this mean for the future of democracy? Clearly, populism and demagoguery are on the march, and liberalism is in retreat. The politics of identity is in conflict with tolerance and inclusiveness. The important thing is to shed our sense of superiority, emerge from our bubbles, and try and understand what people like Trump and Imran Khan represent.

Taslima Nasrin at India Ideas Conclave 2016