Advanced Issues in Accounting: The Big Short Film Analysis Report

This report provides a comprehensive analysis of the film 'The Big Short,' examining its portrayal of the 2008 financial crisis and the ethical issues involved. The report delves into the business description, highlighting how a group of investors predicted the housing bubble and profited from it. It identifies key players such as Michael Burry, Mark Baum, and Jared Vennett, and details the unethical practices of investment banks, rating agencies, government regulators, Congress, mortgage lenders, and even taxpayers. The analysis explores ethical egoism and the consequences of actions like shorting the housing market. It further discusses the role of instruments such as Collateralized Debt Obligations (CDOs), Synthetic CDOs, and Mortgage-Backed Securities (MBS) in transforming a housing crisis into a nationwide economic disaster. Additionally, the report mentions initiatives taken by the Australian Accounting Standards Board (AASB) to mitigate the effects of financial crises. The report concludes by emphasizing the importance of ethical conduct within the financial sector to prevent future crises and provides references for further reading.

Running head: ADVANCED ISSUES IN ACCOUNTING
Advanced Issues in Accounting
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Author Note

1ADVANCED ISSUES IN ACCOUNTING
Film Analysis – The Big Short
Business Description
The Big Short belongs to the genre of comedy or drama. It depicts the true story of
financial crisis via the group of male investors that belong to the world of high value finance.
The movie reflects that the male group of investors correctly predicts the credit and housing
bubble, which eventually leads to them becoming filthy rich. During the mid 2000-s a group of
individuals did bet against the US mortgage market. The film essentially captures the story of the
Great Financial Crisis and its key players.
The film depicts that Lewis did change the concepts of banking by incorporating a single
plan for Mortgage-Backed Securities (MBS) in order to ensure larger profits associated with
lower risks due to the fact that everyone was paying up their mortgages. This continued till the
financial crisis hit in the financial year of 2008. No one had a hint about the financial crisis
coming up, except some, who saw it coming. Jamie Shipley, Charlie Geller, Michael Burry,
Mark Baum and Jared Vennett were precisely the people who could predict the financial crisis.
The banks had already started filling the bonds with riskier mortgagees. This was the only way
the banks could ensure the incurring of profits. The mortgages with excessive risk are known as
subprime and the respective real estate market was built up upon these bad loans. The losses
were calculated as 5 trillion dollars in pension money and 8 million did lose their jobs and a
number as high as 6 million people lost their houses.
Ethical issues
Investment Banks (Bank of America, Bear, etc)
The banks acted as if there would be no defaults in case of the loans that had been
forwarded. The financial institution closed the deal by selling the mortgages. The bankers
restricted their actions to ensure the achievement of their own personal interest instead of the
bank for which they worked. They bundled and facilitated the selling of the subprime mortgages.
This is a pure example of ethical egoism in which fulfilling the self interest is considered to be
the rightful action (Lins, Servaes & Tamayo, 2017).

2ADVANCED ISSUES IN ACCOUNTING
Rating Agencies (S&P, Moody’s, etc)
The Big Three credit rating agencies that are to be discussed are Standard & Poor’s,
Moody’s and Fitch. These three rating agencies account for 95% of the market. There had been
discrepancies in the ratings done by these credit agencies. Some individuals knew the fact that
the rating agencies were attributing irrelevant scores to the products that deserved much lesser
scores but the rest of the market had no knowledge about it. Michael Burry found out that the
mortgage bonds that were rated 65% AAA had no grounds to deserve such high ratings (Floyd,
Li & Skinner, 2015).
Government regulators (SEC)
The government regulator, Securities and Exchange Commission along with the
mortgage broker firms did violate a huge number of regulations. The SEC should have taken up
the responsibility to break up the ties between the Congress and the big banks, and have issued
regulations for the mortgage and derivative industries (Haas & Lelyveld, 2014).
Congress
The big banks did lobby Congress in order to halt the implementation of the modification
and the improvement measures. This is the point where the banks swiped the money from the
Americans and used it for their own benefit (Lai, 2016).
Mortgage Lenders
The loans that the borrowers used to buy the mortgages had been approved for the buyers
who had not been in the financial position to make the required payment (Vazquez & Federico,
2015).
Taxpayers
There must have been instances where the individuals taking loans for buying real estate
had overstated their income on the mortgage applications. The lenders knowing this fraudulent
activity , ignored the fact as they would not be responsible for the cleanup. The evaluators
also overstated the value of the homes and the traders. Thus, the taxpayers did the help these
banks in exploiting the economy (Goh, Li, Ng, & Yong, 2015).

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Handling the ethical issues
The film The Big Short reflects that the key players that have contributed in the financial
crisis faced by the economy. The particular scene in the movie where the two mortgage
consultants bragged about selling subprime mortgages, to the people, who by any means could
not afford to repay the loans. The two-mortgage “consultants” action of creating a huge short
position without being fully honest and transparent with investors was unethical.
An example, of the similar situation was when the poor man met one of the Baum’s team
members in Florida. The man had rented a house and had paid his monthly bills on time.
However, the only problem persisting is that the property owner has not been able to pay for his
mortgages. The renter here does not cooperate with the landlord. This can be justified with the
same concept of ethical egoism. However, later in the movie the renter and his family had been
removed from their house as because the landlord could not pay up for the mortgages.
Another example of the situation that had involved Mark Baum who conducted the
interview of S&P with Vinnie Daniel and found out that the fraudulent activities conducted by
the credit rating agencies essentially led to the financial crisis. The single act of attributing the
poor quality securities with high ratings misled the entire economy, which led to the financial
crisis.
Jared Vennett essentially describes the ethical obligations of the finance industry as
simple and valuable but that transformed into a horrible situation that led to the collapse of the
entire world economy. The major components that transformed a housing crisis into a nationwide
economic disaster was Collateralized Debt Obligations (CDO), Synthetic CDO and Mortgage
Backed Security (MBS). The particular act of shorting was not ethical. Charlie and Jamie knew
that the occurrence of a financial crisis would result in people losing their jobs, homes and
pensions. However, that did not stop them from obtaining profit by revealing their forecast.
Thus, their act of shorting was not ethical.
In the film, Michael Burry who fooled the Wall Street undertook a high degree of risk.
This is because if the fund investors knew that Burry was intending to short the housing market
then they would not have agreed to be in the fund. Thus, such an action of creating short without
being transparent and honest with the investors was unethical.

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Another example involved the situation when in the film Mark Baum and his team
interviewed the clients of the real estate brokers in Florida. The fact that was discovered by the
team was that the interest rates of the clients would not increase. However, the number of the
clients would eventually increase. This reflected that the brokers were ignorant and that such
actions could not be excused.
Measures taken by AASB
A strict network of government regulations could have averted the financial crisis.
However, there are certain initiatives that have been taken by the Australian Accounting
Standards Board for minimizing the effects of the financial crisis. These are as follows:
 The Australian Accounting Standards Board has carried out certain changes in the accounting
principles that has enabled a financial entity to facilitate the reclassification of the financial
assets
 AASB 9 has been specifically designed and states the particular method of treatment of the
financial instruments
 AASB 15 lays down principles in regards revenue from contracts with customers
Thus, as it can be concluded from the above study, financial crisis can be averted provided
that the essential financial sectors of the economy maintain a certain degree of ethics and
integrity.

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References and Bibliography
Bénétrix, A. S., Lane, P. R., & Shambaugh, J. C. (2015). International currency exposures,
valuation effects and the global financial crisis. Journal of International Economics, 96,
S98-S109.
Carbó‐Valverde, S., Rodríguez‐Fernández, F., & Udell, G. F. (2016). Trade credit, the financial
crisis, and SME access to finance. Journal of Money, Credit and Banking, 48(1), 113-
143.
Chen, Q., Filardo, A., He, D., & Zhu, F. (2016). Financial crisis, US unconventional monetary
policy and international spillovers. Journal of International Money and Finance, 67, 62-
81.
Floyd, E., Li, N., & Skinner, D. J. (2015). Payout policy through the financial crisis: The growth
of repurchases and the resilience of dividends. Journal of Financial Economics, 118(2),
299-316.
Goh, B. W., Li, D., Ng, J., & Yong, K. O. (2015). Market pricing of banks’ fair value assets
reported under SFAS 157 since the 2008 financial crisis. Journal of Accounting and
Public Policy, 34(2), 129-145.
Haas, R., & Lelyveld, I. (2014). Multinational banks and the global financial crisis: Weathering
the perfect storm?. Journal of Money, Credit and Banking, 46(s1), 333-364.
Lai, Y., Saridakis, G., Blackburn, R., & Johnstone, S. (2016). This paper uses British large scale
survey data to examine the extent to which the recent financial crisis has affected firms'
operational activity, and whether or not the existence of human resource (HR) practices
have influenced firms' response to recession and workers' job experience. Our findings
suggest that SMEs are more vulnerable during times of economic hardship than larger
firms, but those... Journal of Business Venturing, 31(1), 113-131.
Lins, K. V., Servaes, H., & Tamayo, A. (2017). Social capital, trust, and firm performance: The
value of corporate social responsibility during the financial crisis. The Journal of
Finance.

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Treeck, T. (2014). Did inequality cause the US financial crisis?. Journal of Economic Surveys,
28(3), 421-448.
Vazquez, F., & Federico, P. (2015). Bank funding structures and risk: Evidence from the global
financial crisis. Journal of banking & finance, 61, 1-14.