WASHINGTON – Flashback to Christmas 2002. America was recovering from the twin shocks of the tech bubble crash and the terrorist attacks of Sept. 11, 2001. The stock market was rising, real estate was heating up and optimism was rebounding.
And then there was Jim Bruce, surfing in Hanalei Bay in Hawaii with his family and friends. The L.A.-based filmmaker had just wrapped up work on the campy horror flick “Freddy vs. Jason.” But something much more frightening had taken hold of his imagination.
CDOs, better known as credit default obligations, were becoming a popular way for financial institutions to shift risk off their books as they ramped up lending to a new class of subprime borrowers. Bruce was worried it was all a sham, that instead of reducing risk, these complex new instruments would actually magnify it, helping to fuel a new bubble that could bring down the entire economy.
In other words, a real buzzkill at a beach party in Hawaii.
“No one wants to listen,” Bruce said. “I know what it is to sort of be that voice.”
Fast-forward just more than a decade. Bruce’s dire warnings have come true — and he made a tidy bundle shorting the financial stocks that were at the heart of the global meltdown. Now that money is funding his documentary about the crisis, “Money for Nothing,” focused on the role of the Federal Reserve in stoking booms and busts. The film includes interviews with former Fed chairman Paul Volcker and other top officials. It has been screened for bond traders in New York, executives in Dallas and government-affairs types in Washington.
People are listening now.
Messenger took his knocks
Bruce is an unlikely Cassandra. He studied film at Middlebury College in the 1990s and played professional hockey for a year in Europe before returning to the States to try his hand at Hollywood.
He learned the ropes of the film industry while also getting schooled in the markets during the heady days of the tech bubble.
“It seemed great at first,” Bruce said. “I remember asking a friend if it was a good idea to sell some when you were up 100 percent or if you should wait a little longer.”
He set up an online trading account in 1999 with his life savings of $10,000 to $15,000. He rode the bull market up to about $50,000 and briefly considered cashing out. But he figured if he kept going at that rate, he would be able to retire early.
“No, I’m not kidding,” Bruce said, reflecting on the investment. “That is the psychology of a true novice in a major bubble.”
Of course, the rally was unsustainable. Bruce lost most of what he had earned but gained a new perspective on the markets. He began reading commentary from value investors such as Jeremy Grantham and contrarian economists such as Gary Shilling. He subscribed to Richard Russell’s Dow Theory Letters.
Bruce also turned his filmmaker’s eye on the world around him, and it wasn’t hard to see the plot of the impending crisis beginning to develop — especially in the suburban utopia of Southern California during the early 2000s.
Alex Kriegsman, a lawyer and longtime friend, had bought an investment property before that Hawaii trip in 2002. Then he got an earful from Bruce on the cracked foundations of the economy: Kriegsman was walking into a financial land mine.
“Look, you just took out a mortgage, but it’s not the way it used to be. You’re not borrowing money from someone who has an interest in you paying it back,” Kriegsman recalled Bruce telling him. “He just kind of scared the s*** out of me.”
The conversation prompted Kriegsman to do his own research. He sold the rental property within two years for a 25 percent profit and invested in gold coins. After the bust, the house was worth half what Kriegsman had paid for it. Gold prices skyrocketed.
Bruce started writing his own financial tip sheet for family and friends in November 2006. The first installment was titled “Fasten Your Seat Belts” and warned of an impending stock market correction — or even recession. This time, his goal was not to ride the bull into early retirement but to preserve his investments and hedge against risk.
“Many assets are dangerously overpriced and a number of frightening scenarios are possible,” he wrote at the time. “The model portfolio is designed to guard against a variety of current threats to your financial security.”
Bruce hunted for the most levered financial companies and shorted them: mortgage insurance companies like AIG, homebuilders and regional banks. He didn’t have a lot to gamble, but the returns were substantial. His most profitable bet was against Ambac Financial, a mortgage insurance provider, which he bought for $160.75 in spring 2007 and sold for more than $5,000 about six months later.
By the end of 2008, the fabric of the global economy was unravelling. The mortgage market, Bruce realized, was just the latest manifestation of what he thought were systemic problems in the macroeconomy. And at their root was the Federal Reserve.
“This is the same Federal Reserve that drowned the global economy in cheap money in an effort to avoid deflation in 2001 and 2002. The result of that policy was our current giant debt bubble of historic proportions and the 2008 near-demise of the entire global financial system,” he wrote in his newsletter in November 2008, encouraging friends and family to jump on undervalued assets. “So the irony here is that the same institution that got us INTO this mess is unfortunately the only institution that is powerful enough to get us OUT of this mess.
“As forward-looking investors we must consider what the Fed’s next big mess will be.”
“Money for Nothing” begins with a history lesson.
To help explain where the Fed is headed, the film examines its past. It traces America’s booms and busts from the run on the banks that led to the creation of the Federal Reserve in 1913 to the stagflation of the 1970s. Driving the roller coaster are the 19 men and women at the Fed who help shape the nation’s economy by controlling interest rates and the supply of money.
Too often, the film points out, they fell victim to the same mistakes.
During the Roaring Twenties, the Fed was reluctant to raise interest rates to combat the overheated economy before the stock market crash of 1929 led to the Great Depression. It happened again in the 1960s, when the Fed faced pressure to keep rates low and employment high. The result was stagflation in the 1970s. And in the early 2000s, low rates helped spur the boom in the housing market. Once again, the Fed was slow to grasp the consequences.
Dry subject, Hollywood treatment
The arguments are not new. Books such as “This Time Is Different” by economists Carmen Reinhart and Kenneth Rogoff have tread similar ground. Fed Chairman Ben Bernanke made his name in academia by studying the role of the central bank in fueling the Great Depression — and avoiding a repeat was the singular goal of his first term.
But a documentary is a different beast, especially one made by a layman far removed from the insular world of Fed-watching. Bruce said his goal was to make the film accessible to average viewers — one montage in the movie reveals how little most people understand the Fed — but also challenge the thinking of financial insiders.
To do that, Bruce called on the storytelling techniques from his work in big-budget action movies such as “X-Men: The Last Stand.” The talking heads and lectures on monetary policy basics are interspersed with clips from “Saturday Night Live” and “The Colbert Report.” The Fed’s balancing act is illustrated with black-and-white footage of tightrope walkers.
But the fundamentals of a good movie are strong characters, plot twists, high stakes and drama, and Bruce tried to tease them out of the central bank. Volcker is cast as the film’s hero for taming inflation despite the short-term toll that higher rates took on employment. The fallen angel is his successor, Alan Greenspan, once hailed as the shepherd of the nation’s longest expansion but whose hands-off approach helped lay the groundwork of the crisis.
“We tried to make a film that sets a big table and invites all these different groups,” Bruce said.
The film acknowledges that the Fed’s swift move into uncharted territory during the darkest days of the crisis, slashing interest rates and pumping money into the financial system, helped the country avert another Great Depression. But those actions may not have been necessary if the Fed had seen the risks earlier, Bruce said. And he doesn’t believe they’re necessary now.
“To me the question now is everything is run through the Fed. They’re really Charles Atlas holding the world on their shoulders,” Bruce said. “Do they know what they’re doing?”
Though the film is clearly skeptical of the Fed’s ability to prevent the next bubble, it stops well short of the “End the Fed” diatribes that have gained traction post-crisis among both liberals and conservatives. Maintaining editorial control was critical to Bruce, which is why he funded the roughly half-million-dollar project himself and through online donations.
“My alter-ego value investor has definitely questioned all along doing anything in documentary film,” he said. “It’s more of a vocation than a profession. . . . You don’t do it for the money. You do it because you think a story really needs to be told.”
It may not be what most financial advisers would recommend doing with your life savings. But Bruce has taken a gamble before — and it paid off. The movie is his way of reminding the world that every wave eventually crashes into the shore.
“If I hadn’t put all my money in the film,” he said, “I might start leaning short again.”