November 28, 2015

Gillian Tett, Anthony Bourdain and Selena Gomez might not explain it all in the “The Big Short”

Sir, I refer to Gillian Tett’s discussion of “The Big Short”, a film based on Michael Lewis’s bestselling book. “Finance gets the Hollywood treatment” November 28.

Tett writes: “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.”

I have not seen the film yet but, if Anthony Bourdain did not include mentioning the fact that the quality of the fish stew was to be determined by some very few fish-stew rating agencies; and that the casino in which Selena Gomez placed bets had abandoned the traditional payout scheme in which all bets have exactly the same expected economic value, in favor of one where the safer bets, black or red, pay more than the risky bets, a number, then the film does not fully explain what happened.

Gillian Tett writes “a decade ago [she] was alarmed by the bubble brewing in complex finance…” and indeed in January 2007 she wrote “The unease bubbling in today’s brave new world”

Myself, as an Executive Director of the World Bank, in a formal statement I delivered in October 2004, have also done my fair share of warning writing: “We believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions”. And in January 2003 in FT I had warned about allowing credit ratings to become a systemic risk.

@PerKurowski ©