Hollywood fibs about Wall Street

Which, sadly, some people seem to believe.

John Rekenthaler 18 May, 2016 | 5:00PM

Hollywood, to state the matter nicely, fabricates. Ask a Martian who knows about college fraternities only what she knows from mass-market films, and she will reply that they regularly hold destructive, lubricious parties, and that most fraternity brothers would happily have served in the Hitler Youth had they been born several decades earlier. I attended college; not so. Fraternities were not to my taste--they don't much appeal to literature students--but they weren't much like those in the movies, either.

So, too, with Wall Street. I can't speak to whether Hollywood overstates the excess of Wall Street's parties (probably, but regretfully I cannot speak from experience), but I can address the portrayals of its venality, even criminality. They are overstated, sometimes greatly. Villainizing Wall and victimizing Main make for fine cinema, but as history goes, it lacks.

Consider The Big Short. The film is very well done, and it fairly addresses one aspect of the 2008 financial crisis--speculation in the housing market, and the collapse of both the derivative securities that were created from house mortgages and the Wall Street firms that sponsored them. However, it skips over almost entirely the federal government's involvement. Whether the government did too little by not regulating properly, too much through its sponsorship of the FNMA and FHLMC agencies, or something of both, lies outside the scope of The Big Short. The movie is a partial truth.

The Big Short closes with:

"Banks took the money the American people gave them, and used to it pay themselves huge bonuses and lobby the Congress to kill big reform, and then they blamed immigrants and poor people and this time even teachers! And when all was said and done, only one single banker went to jail."

Again, a partial truth. One can't argue with the first part of the first sentence. (We'll set aside the politically charged second part.) The second sentence, though, is another matter. It implies that there was a systemic cover-up for Wall Street's guilty, that a corrupt legal system flat-out abdicated its duty.

Another perspective: Last week, The New Yorker profiled the U.S. Attorney for the Southern District of New York, Preet Bharara. The magazine writes that he "terrifies Wall Street." He prosecuted hedge fund notables Raj Rajaratnam (Galleon Group) and Steven Cohen (SAC Capital), to name just a couple of his Wall Street targets. (He has also investigated Governor Cuomo and convicted two New York state legislators.) His tactics are so aggressive as to earn him the nickname of "showman," and to generate a rebuke in 2014 from the Second Circuit Court of Appeals.

Bharara was named to his post in 2009. His first task was to investigate the aftermath of the financial crisis. His take:

"Things … were looked at really, really carefully and really, really hard by the best people in the office. There's a natural frustration, given how bad the consequences were for the country, that more people didn't go to prison for it, because it's clearly true that when you see a bad thing happen, like you see a building go up in flames, you have to wonder if there's arson. You have to wonder if there's anybody prosecuting. Now, sometimes it's not arson, it's an accident. Sometimes it is arson, and you can't prove it."

Might Bharara, a highly ambitious Democrat attorney who is eager to stake prominent corporate hides to his career wall, have avoided criminal cases that he could make against politically crippled (at best) or defunct (at worst) mortgage-bond bankers and then aggressively pursued well-placed hedge fund billionaires? Perhaps. The better way to bet, though, is that the case against 2008 Wall Street is nowhere near as straightforward as pictured in the movies. (Or as portrayed by most politicians.)

Striking a sillier note is the new release, Money Monster. You may have seen its trailer. Jim Cramer George Clooney, a TV investment guru, is taken hostage by a young man who accuses St. George of helping Wall Street defraud him. The Saint initially dislikes being held at gunpoint but eventually warms to his assailant's cause (Stockholm syndrome?). The two join forces to capture the evildoers.

I will not be watching. That said, I did wonder how our antihero managed to lose all that he owned (per his anguished girlfriend). The answer, per Wiki: He invested everything into one stock, after hearing Jim Cramer George Clooney plug the company during his show.

Well, that's realistic. A character played by a 25-year-old actor, who works in a "blue-collar" job, is so much of a stock-market junkie that he watches investment shows (care to bet how many of Cramer's viewers are under the age of 30?). Yet he knows so little about investing that he is shocked, absolutely shocked, to learn that his single stock could decline significantly in price.

In other words, to make the plot work, the scriptwriters had to invent what does not exist. In this world, as opposed to Hollywood's, blue-collar millennials generally do not hold investments. If they do, they have mutual funds, courtesy of a company-sponsored retirement plan.

Thus, the movie's villain is Wall Street, and its hero is a man patterned after nobody who lives; who ignores every article ever written about how to make a first investment; who takes a different path through greed (why else put all faith into a single egg, except the hope that the parent geese were golden?); and who then becomes violent and blames everybody else when his investment failed. Par for the course, I suppose.

My point? This may be costing millions of Americans real money. Not those who need it the least. Per a 2015 Gallup poll, the percentage of American households with income exceeding $75,000 that own stocks (mostly indirectly, through mutual funds) has remained steady during the past decade. But the percentage in the next income group, from $30,000 to $75,000, dropped from 72% to 61% between 2007 and 2010, and then slipped again to 56% as of last year. That represents a lot of money left on the table, given that stocks roughly doubled during the 2010-15 period.

I realize that few of this column's readers need encouragement to invest. You might know people who do, though. Feel free to send them this article. If after reading it, they feel better about Wall Street, get invested (through low-cost funds only, no individual stocks), and stay with the program, then we will both have done some good. (And my clicks will be higher, too.)

John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for Morningstar.com and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.

About Author

John Rekenthaler

John Rekenthaler  John Rekenthaler is Vice President of Research for Morningstar.