I was invited to discuss the film The Big Short (2015), directed by Adam McKay, which is based on Michael Lewis’s excellent 2010 book of the same name, on BBC Radio Scotland’s Good Morning Scotland show.
I appeared alongside the Glasgow-based fund manager David Ridland, founding partner of Castlebay Investment Partners, and manager of the Castlebay UK equity fund, and the Good Morning Scotland reporter David Allison, who makes an excellent stab of explaining collateralised debt obligations. Before the discussion commenced, David and I were treated to an exclusive screening of the film at Pacific Quay.
In the post-screening discussion, I highlighted the role of the leading credit rating agency Standard & Poor’s in giving false and misleading “AAA” ratings to what it must have known were tainted bundles of debt. By rating nearly 80 per cent of the CDOs which it was asked to review as “AAA,” S&P allowed high-risk, subprime-laden products to be sold as safe investments and to permeate the global financial system.
I also mentioned the role of the Royal Bank of Scotland subsidiary RBS Greenwich Capital in packaging and burnishing (i.e. misrepresenting) toxic US mortgage debt.
The Royal Bank’s US arm was major underwriter and packager of residential mortgage-backed securities (RMBS) and collateralised debt obligations (CDOs) in the build up to the crisis. Between 2005 and 2008, Connecticut-based RBS Greenwich underwrote approximately $250 billion of mortgage-backed deals, massively contributing to the global financial crisis by neglecting due diligence and misrepresenting the quality of loans to investors.