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After the Fall: Beyond The Big Short

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Anyone working in finance or real estate watches the housing and stock markets, economic indicators, social trends and, more recently, films. Specifically, one of this season's most-lauded pictures, The Big Short, based on the book by Michael Lewis.

Director Adam McKay takes a stellar ensemble cast and uses broken fourth walls and quasi-documentary effects to tell the story of a small group of traders who saw early on what the rest of the world would come to know too well: the subprime housing bubble of the early 2000's was set up to crash like an "atomic bomb." That analogy belongs to Steve Carell's character, Mark Baum, a fund manager left staring in disbelief at the storm no one on Wall Street, or in government, could or would see coming.

The Big Short covers subject matter similar to that of 99 Homes, which was released in September 2015. In the film, actor Michael Shannon plays a rapacious real estate agent in the aftermath of the crash, callously ejecting struggling families from their homes to salvage sales.

In 99 Homes, Shannon's character appears to receive some initial measure of karmic retribution. However, the consequences of events in The Big Short, summarized so simply in a post-script, emphasize that the bubble-makers who nearly tumbled the world's economy did not face strict enough consequences, if any at all. Despite regulatory reforms like the Dodd-Frank Act, big banks were bailed out with public money and, adding insult to injury, paid out lavish bonuses-- some to the same people who caused the meltdown in the first place.

Many commentators have stated that five years after its passing, Dodd-Frank hasn't had the impact it was meant to have, while eight million Americans lost their homes, millions more lost their jobs, and the country went into the worst economic period since the Great Depression.

However, there have been some meaningful changes, such as the creation of the Consumer Financial Protection Bureau, which has recovered billions in dollars for consumers from financial institutions that violated federal laws. Also, the establishment of the Financial Stability Oversight Council and Orderly Liquidation Authority, which monitors financial stability of the many "too big to fail" institutions. It also provides for orderly liquidation or restructuring if those firms falter.

In theory, the council has the authority to break up banks considered "too big" or force them to increase their reserve requirements. Yet, nearly a decade later, the big banks are bigger than ever. This leaves many bemoaning whether or not the public, which was the biggest loser in the economic demolition, is any safer than before.

Regardless of where you stand on that particular reading of recent economic history, one undeniable thing has emerged-- a new breed of online lending companies. Built on the tenets of transparency, access to good quality investments for all people and earning trust with customers, these companies use technology - connected by the Internet - to make this all happen. Companies like Prosper Marketplace, Lendingclub, Ondeck and Patch of Land represent values and systems that will hopefully have as many long-lasting, structural changes as for the hoped-for effects of Dodd-Frank.

Of course, there have been other regulatory changes aside from Dodd-Frank in the wake of the Great Recession. In particular, the passing of the JOBS Act (Jumpstart Our Business Startups Act), which fundamentally changes the way entrepreneurs access capital. For example, removing the ban on general solicitation so companies can publicly talk about raising funds also allows for more efficient markets -- entrepreneurs reach investors more efficiently and in turn, investors can directly reach investment opportunities.

But it isn't just the how of people getting their funding that has changed -- it is also the why and who - specifically who is making this possible.

In the wake of the Big Short-spawned Great Recession, forward-thinkers, such as Jorge Newbery of AHP Invest or Jason Fritton of Patch of Land, used the newly formed JOBS Act and revised securities laws to help revive hard-hit cities and allow affected communities to invest in themselves. While at the same time, providing a new and more democratized group of investors and developers easier access to each other. The intention was to channel funds into paralyzed and destitute neighborhoods in hard hit areas like Chicago or parts of Florida -- and the incredible response has led real estate to become the single biggest category of capital raising using JOBS Act legislation.

Now, far from Wall Street, crowdfunding and peer-to-peer lending companies are continuing to make both sides of a once opaque, private and almost secretive finance equation available to those who would never have access to either investing in a hedge fund, or easily getting a loan from a bank.

The JOBS Act, combined with an ever-more connected world, has led to the creation of new lending platforms that operate online and exist in a new, open environment of increased transparency and peer-to-peer funding. Some call this sunlight banking, where transactions with technologically-enabled and trust-oriented online lenders take place: documents are accessible during each step, so there is no "looking the other way" during any part of how this newer process works.

Another new aspect to this sunlight banking, especially in the segment of real estate crowdfunding, is prefunding, which is described as a "killer app." Pre-funding means that in addition to underwriting the loans, the crowdfunding company actually pays the sponsor/borrower the entire loan amount before making it available to investors. This action shows that the platform has skin in the game, and acts as an incentive to do the maximum due diligence possible.

All of this -- transparency, trust, access and skin in the game -- speaks to a newer and evolving landscape after the events depicted in The Big Short.

Regardless of whether traditional banks and finance firms, as depicted in the film, have learned from history, we have taken those lessons to heart and are privileged to be telling a brand new story in the wake of it.