Elon's Big Short

Ryan Gosling explains what could go wrong if Musk gets his way.

Feb 13, 2025

Image Credit: Gage Skidmore from Surprise, AZ, United States of America, CC BY-SA 2.0 <https://creativecommons.org/licenses/by-sa/2.0>, via Wikimedia Commons.

If you’re as old as me, you probably have some memory of your parents talking about how bad the economy was back in 2008. Even if you don’t recall the exact details, you likely at least remember things sucking pretty badly. And if you’re older than me, you certainly need no reminder as to how bad it ended up getting.

In 2015, Paramount Pictures released a film titled The Big Short. The film included some pretty major Hollywood stars, including Christian Bale, Steve Carell, Brad Pitt, and even future Barbie star, Ryan Gosling. There is a certain scene in the film where Ryan Gosling’s character explains how a big crash is brewing in the housing market, the very exact crash that preceded the 2008 financial crisis. Take a look below:

A Jenga game from hell

Did you ever play Jenga as a kid? If you did, you know the objective of the game is to remove blocks from one giant tower without toppling it over. The higher blocks are easier to remove, but the lower blocks are obviously riskier considering they support the overall structure more. If you watch the clip above, Ryan Gosling’s character uses a Jenga tower to explain how the housing market was back in 2008. The highest level of blocks are labeled with AAAs and the lowest blocks are labeled with Bs. This lettering represented how risky a certain financial product was. In this case, the financial product was a “mortgage-backed security (MBS).” Therefore, each block can be considered an MBS.

So what is an MBS? Think of it as a pool of mortgages. An MBS “block” labeled AAA would be considered the very best, least risky of the bunch. This is because it is mostly including mortgage borrowers with excellent credit scores, so we’re talking credit scores in the high 700s to the 800s. Investors who purchase a mortgage-backed security make money when the homeowner completes their monthly mortgage payment. Therefore, if the homeowner has an excellent credit score, it is likely they will have no problem paying back their mortgage and thus it is a safe bet for the investor. However, if we go further down the tower to the B-rated blocks, the investment becomes far riskier. That is because these B-rated MBS “blocks” include a larger share of homeowners with lower credit ratings who may ultimately be unable to fulfill their mortgage payments, thus presenting the risk of defaulting on their loans. This is what is called a “subprime mortgage.”

So, you get the idea? The higher AAA-rated blocks are some of the safest investments, just like pulling a higher block out of the Jenga tower is a pretty safe move. The lower B-rated blocks are quite riskier, much like pulling a lower block out of the tower would be a pretty big gamble. Now that we understand what each “block” represents, what is the big picture? What does the tower as a whole represent? In the scene above, Gosling’s character refers to the entire Jenga tower as a “collateralized debt obligation (CDO).” Sounds like a pretty scary name. Well, these “CDOs” were quite scary back in 2008.

Essentially, a CDO was comprised of different tranches (layers) of mortgage-backed securities much like a Jenga tower consists of different layers of blocks. Some of these “tranches” were quite good, like the AAA-rated blocks at the top of the tower, while some of them were far riskier, much like the B-rated blocks further down the structure. In a way, the 2008 crash depended on a very high-risk game of Jenga, one in which the tower was bound to collapse. And collapse it did. The nation’s largest financial institutions at the time (Lehman Brothers, Bear Stearns, and AIG) who held CDOs all saw their towers collapse. And with their towers collapsing, so did the economy.

“And no one is paying attention. No one is paying attention, because the banks are too busy getting paid obscene fees to sell these bonds.”

This quote from the clip is quite important. If these CDOs were truly so awful, why were they even being sold in the first place? That’s because, as Gosling’s character explains, the banks were making huge profits off the fees that came with selling the CDOs. According to one report from Stanford Law School, “Three firms—Merrill Lynch, Goldman Sachs, and the securities arm of Citigroup—accounted for more than 30% of CDOs structured from 2004 to 2007. Deutsche Bank and UBS were also major participants.”1 So, these banks were making a great deal of profit by packaging and selling these CDOs to investors. In fact, if we look at Goldman specifically, they would go on to sell a little something called a synthetic CDO.

Synthetic CDOs

So, we understand what a regular CDO is. Then what the hell is a synthetic CDO? According to SoFi, “A synthetic CDO is a type of collateralized debt obligation that invests in non-cash derivatives, such as credit swaps… without owning the underlying assets.”2

Okay, unless you have an economics or finance background, those words probably made you even more confused. Let me break it down for you:

Unlike a regular CDO, which is backed by actual mortgage-backed securities, a synthetic CDO is not backed by such "real" assets. Instead, it’s backed by non-cash derivatives, which are financial tools that allow investors to bet on the performance of the mortgage-backed securities. Essentially, while a regular CDO consists of actual mortgages, a synthetic CDO consists of bets on those mortgages.

One of the key derivatives used in synthetic CDOs is a credit default swap (CDS). Gosling’s character in The Big Short references these credit default swaps as the method to profit off the synthetic CDOs. According to the Corporate Finance Institute, “A credit default swap (CDS) is a type of credit derivative that provides the buyer with protection against default and other risks.”3 This “protection” meant that the party purchasing the CDS contract within the synthetic CDO would receive a payout once homeowners defaulted on their mortgages in 2008.

If that’s still too confusing, I don’t blame you. Let’s use a real world example. Imagine taking out a fire insurance policy on a house you don’t even own. However, you have a strong feeling that this house will burn down, meaning you would collect a huge insurance payout when it does. That’s essentially how credit default swaps were being used in these synthetic CDOs: bets disguised as insurance, where investors profited once the housing market collapsed.

Firms such as Goldman Sachs packaged these credit default swaps into synthetic CDOs, knowing they were bound to fail. According to a business journal from The Wharton School of the University of Pennsylvania,

“In April 2010, the SEC charged Goldman and one of its vice presidents with fraud for selling a synthetic CDO called Abacus filled with subprime securities, but without disclosing to investors that a hedge fund that helped select the mortgages was shorting them. The SEC said investors lost more than $1 billion in the scheme.”4

Pretty crazy, right? According to the exact 2010 Securities and Exchange Commission (SEC) report,

“Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.”5

Basically, Goldman did not inform investors that the hedge fund knew how bad the synthetic CDO actually was. Not to mention, the hedge fund was literally betting against the synthetic CDO they themselves built. The hedge fund deliberately selected mortgages with a high likelihood of default to be linked to the credit default swaps within the synthetic CDO sold by Goldman Sachs, which ensured that when those mortgages failed, the hedge fund would profit from the resulting CDS payouts. The hedge fund and Goldman knew this, but whichever investor purchased the synthetic CDO was screwed and would be on the losing side of the bet. In economics, we call this “asymmetric information,” which is when one party has more information on a product than the other.

So, while people lost their homes and had to navigate the worst financial crisis since the Great Depression, a lot of big banks reaped some pretty big benefits.

The Consumer Financial Protection Bureau

Let’s get back to today. We understand now that a lack of financial regulation was what allowed the CDO game to play out as long as it did, unfortunately taking down the economy with it. In response, an agency called the Consumer Financial Protection Bureau (CFPB) was formed in 2011 to monitor predatory practices similar to what had occurred in the 2000s.6 According to CNBC, “The agency has aggressively policed financial firms and [as off June 2024] it has returned nearly $21 billion to consumers since its creation in 2011.”7

Well, it wasn’t around to prevent the Great Recession, but at least we have it now.

Though, not for much longer.

Congresswoman Nikema Williams on X: "The @CFPB has returned more than $21 BILLION to consumers who were cheated by big corporations. It should come as no surprise that an unelected billionaire wants — X.com

Of course, certain individuals are not very happy with agencies such as the Consumer Financial Protection Bureau being around. One of these very unhappy individuals is Elon Musk. In eliminating the CFPB, Musk would stand to benefit substantially. And it looks like he will end up getting what he wants, as the Associated Press reports,

“The Trump administration has ordered the Consumer Financial Protection Bureau to stop nearly all its work, effectively shutting down an agency that was created to protect consumers after the 2008 financial crisis and subprime mortgage-lending scandal.”8

As NPR explains, “In taking a hatchet to the CFPB, Musk is not only potentially clearing regulatory oversight of new money services on X, but delivering a win to other Silicon Valley giants, which have for years been fighting against the bureau…”9

If you remember my article on Musk from last week, I explained how he was leading a hostile takeover of the federal government on behalf of Big Tech. Well, this will mark a huge victory for this takeover.

And as a result, we could essentially see a repeat of what happened in the lead up to the 2008 financial crisis. In eliminating the Consumer Financial Protection Bureau, we are taking a major step in recreating the very economic conditions that allowed for the housing market to collapse.

If things were to get this bad again, you can be sure Musk and his Big Tech buddies will be fine. They definitely have more than enough money.

The question is, will you and your family be?

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