Heads I Win, Tails You Lose: The Big Short

Fresh from watching the Big Short in a crowded theater in Philly, I wanted to shout out my experiences from that time, using excerpts from my book: "Making Money Matter... Impact Investing to Change the World."

"In early 2006, most of the Legg Mason advisors were invited to a big hotel and feted by Citigroup, one of the last occasions Sandy Weil held forth as chairman of what was then the largest corporation in the world in terms of "impact" (not necessarily "positive impact"). I excitedly assumed I could use these resources to expand the universe of investments available to my clients at Legg Mason. In fact, the opposite was true.

Tight, bureaucratic, and impersonal, the conference turned my stomach when the speaker leaned out like a snake oil salesman and said, "You are going to make so much money on mortgages!" He offered $2,000 for each mortgage application turned in--even if the mortgage was not realized. Jaws dropped, and brokers grinned. Something was amiss. They just wanted paper. Little did I know! The company needed "paper," even worthless paper, to justify the debt on its balance sheets. This was the beginning of what might have been the end of big banks.

Six months later, on top of the unethical mortgage push, I noticed that interest rates on cash in my clients' portfolios differed for no apparent reason. Clients with higher fees earned higher interest rates. Older folks, whose fees were minimal, lost yield in their cash. I was mortified and decided to get out when the Wall Street Journal praised Citi for following Merrill Lynch's business model of manipulating interest rates to improve the bottom line. How could I submit clients to this amoral manipulation? Little did I know I was jumping from the frying pan into the fire. I took a big risk by leaving the comfort of a big corporation, and I still had a great deal to learn."

At the start of 2007 an independent advisor invited me into his secretly debt-ridden lair to continue a habit of "borrowing" from clients. He enabled me to build impact investment funds as long as I did not get involved with the debt fund we created or the finances of the firm. I naively accepted, working in the dark with absolute trust in my new boss. Explaining what I had seen at Citi with the worthless mortgage applications, we prepared the clients for a down turn and entered 2008 60% in cash which meant that we lost only 5% in the meltdown of 2008 described in the movie. Then the auditors moved in and ultimately the founder of the firm was caught and the firm was shut down. Here is more from the book:

"The financial industry is full of such stories. I imagine when a person gets in too deep in debt to see a way out, they may become numb and drift into a kind of mindless state of denial, seeing no harm in taking more and more until being caught or filing for bankruptcy. The phrase "drowning in debt" has taken on a new meaning for me. My earliest childhood memory is of drowning after I plunged off a diving board into the dark pool of the Brook, a swimming hole on our Connecticut farm. I remember blissfully staring up at the sun from the bottom, and peacefully watching my bubbles floating to the surface before my eight-year-old cousin rudely tackled me, dragged my three-year-old body onto the bank, and roughly pumped me out.

"In this case, those who were exposed to the malfeasance also experienced the rude awakening along with the debtor. In reaction to the harm done to me and to my clients, I experienced all the stages of grief: denial, anger, bargaining, depression, and acceptance. In 2012, I took charge, along with a newly configured team of workers dedicated to fixing what we could and saving the best investments. Our goal was to prove that, over time, all clients, disgruntled or not, would realize that working with us had become beneficial.

"A wise mentor once told me that life will never throw you anything you can't handle: the challenges of life would not be there but for your capacity to overcome them. The most difficult professional challenge I have had to endure was facing my shortcomings and the anger of friends. I chose to make amends by building the best team I could possibly lead."

The Big Short brought that transition period from the big banks vividly back for me. It is a gripping reality drama and yet I fear that investors and advisors may experience it only as a story, a virtual reality, especially as the market recovered and the banks were not transformed. In fact the "too big to fail" banks are 80% larger.

At the end of the movie a stunned audience was silent for a moment and an old man cried out "Bernie Sanders in 2016!" True enough, he may be the only candidate to call for serious financial systems change. But the status quo is strong. I imagine another Bush/Clinton battle is already arranged.