And if nobody had discovered that the companies were cooking their books, they would have gone on turning a profit.
From there, things get a little sketchy, but in essence, these companies would claim higher profits and more assets than they actually had, inflating stock prices. So, Chinese companies had to do what’s called a “reverse merger,” in which a Chinese company buys a US-based shell company to allow them to trade on the US market. However, foreigners cannot invest directly in the Chinese market. Rothstein does a brilliant job explaining the situation in the film, but in short, when the housing bubble burst, all that capital had to go somewhere and it went straight into Chinese investments. This time, however, the bad investments aren’t based in the American housing market, but in fraudulent Chinese companies.
Director Jed Rothstein does something similar in his new documentary The China Hustle. In that film, director Adam McKay followed fictionalized version of the real life investors who realized millions of Americans were going to default on their sub-prime housing loans and turned a profit off of them. Lots of investors–both big and small–lost money and the few who didn’t got to learn all about it in 2015’s The Big Short.
The American economy has never quite recovered from 2008’s burst housing bubble.
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