Wait, Isn’t The Movie About Housing?
Yes, that’s true, but it is more about the jobs of the characters in the movie.
Remember the Scene With the Chef?
Roughly speaking (very roughly), the Chef was taking different ingredients, mixing them together and selling soup. Yeah, if you have a background in fixed income derivatives, then I am taking a shortcut here. Anyways, the chef was mixing up the ingredients and selling soup. This process is one that Wall Street and investment bankers do all the time, with every financial contract in existence. They have computing and academic resources, that are basically unlimited.
Wall Street Does This All The Time
The general point is that Wall Street finds ingredients and tries to create soup all the time. In The Big Short, the ingredients were mortgage contracts that people took out to recklessly speculate on the housing market. We can all agree that a mortgage is a financial contract. Fact is, there are a lot of other financial contracts in the world.
- Credit card receivables
- Auto loans
- Student loans
- Commercial mortgages (on commercial buildings)
- Sub-prime auto loans
Wall Street collects the ingredients, and finds out if it can sell “soup” from the collection of ingredients, and the price that it can sell the “soup.” If the cost of ingredients is lower than the price it can sell “soup,” then it makes and sells as much soup as it can, given the availability of ingredients. There are many different types of soup in the world, and the ingredients are not mortgages, but rather, contracts in the bullet-pointed list. That is what every chef would do, and that is what they are paid to do.
What Does This Have to Do With Obamacare???
What in the world does this have to do with Obamacare? One major objective of this Newsletter and the central idea to Medicare Mayhem is to correct this wrongly-held thought. Health insurance is not healthcare, health insurance is a financial contract.
Now, re-read the prior paragraph. If Wall Street could’ve collected “ingredients” that were health insurance contracts, and made a soup of those ingredients, and that soup would be profitable, it would’ve already done so. There can be ZERO doubt that Wall Street has considered this path, it has every motive to be a chef, it knows that there are many buyers of soup (investors), it is simply that the price of the ingredients would be too high, and thus, the soup would be unprofitable.
The reason that the soup would be unprofitable is that one of the ingredients that it would require would be the ingredient that is basically the anti-poison ingredient. That ingredient is described in the prior article.
From the prior article, ‘The answer is yes, there is a layer of “backstop protection,” just in case.’ Soup buyers want to have that ingredient to protect themselves from poison, and it isn’t available at a price to make soup profitable. What is the “poison” described here? Poison are the huge losses that health insurance carriers can suffer when their estimates are systematically wrong.
SO, if you understand what the chef actually was doing, and how he was doing it, you can understand why it was almost certainly the case that the ingredients were not good enough to sell soup. For Obamacare, that meant that the ingredients were not good enough, meaning that the price of health insurance contracts was too low, given the risk. The buyers of soup would not buy soup because the quality of the ingredients was not high enough or the price of the anti-poison was too high.
The bottom line: the soup could not be made if the ingredients were health insurance contracts. If it could’ve been made, it would already exist. Motivated chefs and natural buyers of soup exist around the world. Given that it doesn’t exist, something MUST be wrong with the ingredients. Those ingredients? Health insurance contracts.
Back to The Big Short
Last point, which also illustrates how wrong The Big Short was in describing the participants. In addition to portraying the reckless speculators on housing as exotic dancers, it portrayed the buyers of soup as the crazed people betting on Selma Gomez playing blackjack.
That could not be further from the truth. The frenzied crowd was highly educated, had access to a global menu of “soups,” and could put the chefs in competition with each other. In many cases, the frenzied crowd had better information about the availability and price of soups than the chefs. Do you remember the scene that revealed this information? NOPE.
Viewers were left with an incomplete, highly skewed set of information, which is why I have spent a lot of time dissecting the movie for you, because this is what you face all the time in varying degrees when you read financial articles, watch CNBC, and listen to elected officials. It’s difficult enough to start with, and it’s made a lot harder by these partial, or biased, presentation of facts.