The movie, The Big Short adapted from the non-fiction book by Michael Lewis, helps explain the 2008 financial system collapse.
The story reinforces how an individual, Michael Burry can assess the performance of a system, identify weaknesses and opportunities for improvement, benefit from the knowledge and also help raise awareness of the need for systemic change. It also reinforces that needed improvements to a system have to be supported by “top management”.
Policies identify the aim of “the system” and the system determines 85-100% of the result. In other words, Burry concluded that Federal policies on mortgages and their derivatives that were leveraged and exploited by the banking and investment industry were leading to results that would lead to a financial collapse. Burry took action that raised awareness on what he believed to be weaknesses in the system by working with the investment bankers to develop a “new product” that he could then buy and use to short the market. Burry’s observation seemed obvious in hindsight but was oblivious to almost all stakeholders at the time.
Despite the devastation that the collapse of the financial system had on individuals as well as within the country and on global markets, Burry concludes that the needed improvements have yet to be made thus setting the conditions for further catastrophe. Reflections on the Big Short – Interview with Michael Burry – Thinks another financial crisis is looming.
Author Michael Lewis limited the scope of the Big Short to that of the individuals that worked “in the system”. Lewis’s niche is discovering unique characters such as Michael Burry that take “on the system” and win big.
Criticisms of the book included the fact that the handful of individuals in government, rating companies, and the Federal Reserve were not signaled out for their failures in not “preventing and fixing” the weaknesses in the system that led to the crash and a bailout by the US taxpayers. The winners were perceived to be the “elites” in the financial and political areas and the “losers” were the investors and U.S. taxpayers.
A Way Ahead
The financial system is interrelated with the political system. Practical fixes through application of a new model for Quality Leadership in the political system would also lead to needed repairs in the financial systems.