Peeling away financial reporting issues one layer at a time

Long on “The Big Short”

TheBigShort2With the Oscars nigh upon us, I should tell you that I fell short of my goal to see The Big Short.   How did subprime mortgages morph into weapons of mass financial destruction? How did a self-anointed few amass untold obscene amounts of ill-gotten gains while avoiding prosecution?

Since I already was pretty familiar with the answers to these questions, my main interest in the movie stemmed from its evident success as an educational experience.  As a professional explainer myself, I was eager to discover how its creators were able to deliver accurate information to viewers who had relatively little knowledge of financial markets, and to do so without apparently sacrificing the movie’s entertainment value. To make a long story short (pardon the pun) I think I eventually became the last person in Phoenix who still wanted to see The Big Short but hadn’t gotten around to it.  So, with theaters now back to 100% lowest-common-denominator fare, I did what comes more naturally to me: I read the book instead.

Like I said, I don’t know a lot about the movie, but I can now say that the book is engrossing (I read it in just two sittings) and  is itself a masterpiece of clarity.  It also has an excellent index, which I have already used on a couple of occasions for later reference.

Announcing The Accounting Onion Bookstore! 

And you can purchase The Big Short at my new online bookstore!  I am steadily building up a list of titles — mainly in accounting and finance — to share with my readers.  If you see fit to make a purchase through The Accounting Onion Bookstore, you will be helping to support my blogging.  Suggestions for titles (along with a brief personal blurb) are also most welcome.

A Blast from the Past

I am also writing this post because one of the The Big Short’s final anecdotes relates to one of my earliest blog posts.  From the book:

“That morning [Friday, March 14, 2008], Eisman [one of the actual big shorts] had been invited on short notice by Deutsche Bank’s prominent bank analyst Mike Mayo to address a roomful of big investors.  In an auditorium at Deutsche Bank’s Wall Street headquarters, Eisman was scheduled to precede the retired chairman of the Federal Reserve, Alan Greenspan, and be paired with a famous investor named Bill Miller—who also happened to own more than $200 million of Bear Stearns stock.

Starting at almost precisely the time that Eisman began speaking through the end of his brief presentation, Bear Stearns stock declined about 40%.  It was the beginning of the end.  

From my blog post of March 18, 2008, here is a related incident that was not mentioned in the book:

“Last Tuesday (March 11, 2008) [just a couple of days before Eisman’s presentation], SEC Chair Christopher Cox made the following statement to reporters: ‘We have a good deal of comfort about the capital cushions that these firms [the five largest investment banks, which included Bear Stearns] have been on.’ (http://www.cnbc.com/id/23576630)

At the time, Bear’s stock was at $60, a five-year low, and just one day earlier, Bear issued a press release denying rumors of liquidity problems. The stock tumbled to $30 early Friday, and over the weekend, JP Morgan struck a deal to buy Bear Stearns for a paltry $2 per share…. [final purchase price was about $10 per share]”

It’s a serious thing, yet understandable at some level, for Bear Stearns to spin its financial condition, but it was quite another for the SEC to essentially endorse an investment in Bear Stearns! Christopher Cox, who in my opinion was the worst SEC Chair in its history, should have resigned.  Alas, he stayed on just long enough to hobble accounting with the infamous IFRS Adoption Roadmap.  Like his incompetent chief accountant and the POTUS who appointment him, Mr. Cox has faded into obscurity.

* * * * * *

41AjlizDVpL._SX329_BO1,204,203,200_I stopped reading novels years ago, and the only “best picture” nominee I saw this year was Bridge of Spies.  But that won’t stop me from watching Chris Rock host the Oscars — or even predicting that The Big Short will be a classic that should taint Wall Street until real reforms occur.

For more about that, I suggest another brilliant book, The Bankers’ New Clothes.  In the spirit of both books, I am going to conduct a thought experiment in my next blog post.  Could a different system of accounting by financial institutions have prevented the 2008 Financial Crisis?  How might it make us safer today?

1 Comment

  1. Reply Anna April 11, 2016

    The movie is excellent. It remained interesting all throughout despite the topics being discussed which may be something new to a lot of people. I hope you get to watch it too!

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