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Lessons learned from The Big Short

Big Short Panelists
Gillian M. McCombs, Dean and Director, Central University Libraries (center), with panelists (from left) James Linck, who served as moderator, Cullum Clark, Rita Kirk and John Duca.

Panelists unraveled the complexities of the financial crisis in a discussion of The Big Short: Inside the Doomsday Machine by Michael Lewis. Sponsored by Friends of the SMU Libraries September 13, the event continued a campus-wide, cross-discipline exploration of the 2012 Common Reading selection.

James Linck, Distinguished Chair in Finance in SMU's Cox School of Business, moderated the lively conversation. Speakers included Cullum Clark, President, Prothro Clark Company; SMU Treasurer Mike Condon; John Duca, Vice President and Senior Policy Advisor, Federal Reserve Bank of Dallas, and adjunct professor of Economics in Dedman College; and Rita Kirk, Director of the Maguire Center for Ethics and Public Responsibility and professor in the Division of Communication Studies, Meadows School of the Arts.

Condon set the scene by describing the "perfect storm": pressure on Wall Street to create new instruments tied to the booming mortgage market; ratings agencies that "were duped" into putting their stamp of approval on toxic bonds; and a system that encouraged mortgage lenders and borrowers to cheat the numbers.

Big Short Panelist Mike Condon
Panelist Mike Condon described "the perfect storm" that led to the financial crisis.

A distorted incentive system also fueled the meltdown, said Linck. "If you tell me that you're going to pay me to originate a loan, and it doesn't matter if the loan is defaulted on, then you're going to have a lot of loan originations," he said. "And if the people who buy the loans can then sell them and know they'll be bailed out, we have a system that's bound to go crazy."

"We privatized gain and socialized risk," Duca said.

The housing and financial markets "feed off each other," added Duca. "When the bubble was building, housing prices were rising, and the problem was hidden." Overleveraged homeowners were able to sell their homes for more than what they owed. But when prices dropped, the house of cards collapsed.

The crash was not "a bolt out of the blue," said Clark. "When you see the degree to which housing prices became untethered from people's incomes, collapse was a dead certainty, but the timing was hard to call."

He called the book "an interesting story of our time" populated by Wall Street insiders focused on making profits and "indifferent to the underlying engine of the machine" and others who cast an analytical eye "to the plumbing" and figured out what was happening. All of them ended up "wildly wealthy," he noted.

The losers were "the little people who, in many cases, lost everything," said Kirk. "And that's the tragedy of the book."

"We have to be careful about the dreams we're sold as an American public," she added. "Lots of people should have known that the deal was too good to be true, but they wanted to believe. There's plenty of culpability for everyone."

View video of the discussion at http://www.youtube.com/user/SMUVideo/videos?query=the+big+short.