I recently watched a film "The Big Short", this is a wonderful film it is more of a documentary-like film, with the actors who played main characters in causing the crises, sometimes taking breaks and explaining directly to the camera exactly -what was happening. They also used different additional clips and sketches, with beautiful actors and actresses doing exotic things to explain very complex financial instruments.
It ain't what you don't know that gets you into trouble.
The story was traced back to the 1970's when banking could be said to be boring. There was a particular person, named Lewis Ranieri of Salomon Brothers, who is said to have created mortgage-backed security (MBS). These are a group of mortgages bundle together hence lowering the risk and raising the yield or profit. Now there was no problem as long as these MBS main contents are reliable, has been well validated and are verifiable. Initially they were well rated and did not have any problems. There was a scene with a sexy Margot Robbie who is an actress in a bubble bath scene and drinking champagne, she explained further that banks were making billions and billions off these MBSs. Of course, people started to get greedy and since there is a limited number of stable reliable working people who want mortgages, they started to put in riskier and riskier clients and bundle them up under the MBSs and the rating people drunk on money and conflicting interests allowed them or they still rated the MBS triple AAA. Dr. Micheal Burry picked up on this. Who is Dr. Micheal Burry?
Dr. Micheal Burry (portrayed by Christian Bale), in a previous life he worked as a neurologist resident then a pathology resident at Stanford Hospital. As at the time we meet him in the film he was working as a Hedge Fund Manager at Scion Capital. The way he was played by the actor, he looked as he was autistic and he was given the freedom to invest money by his investors. He made so much money for his investors that by the end of 2004, he personally was managing $600 million and was turning money away. What he noticed according to the film was an increasing number in deferments and frauds. He went through mortgage lending practices in 2003 and 2004, he correctly forecast that the real estate bubble would collapse in early 2007 when the adjustable rates would kick in and he believed that deferments will skyrocket. Then he bet against the banks, i.e sell short, which means that you place a bet that the price of the bonds (MBS) will fall below a certain price. In the film, they explained further that in the financial world are a lot of "financial instruments", going in the background. Now, people will ask, what will happen if the bank goes under and cannot pay the money. Micheal has foreseen that scenario and had got that bet insured by a third party. So, whatever the outcome he will get his money back. That is a credit default swap, of course, he will have to pay premiums unto its maturity, but he believed that was a small price to pay because he was so sure of his figures. People can place bets on the price of almost anything and try to predict whether the price will go up (Long) or down (Short), then they will sell the stock at a particular fixed price and make a profit. Before going on let's see how the film explained other complex "financial instruments". It is important because these link all other to another. Now chief chef Anthony Bourdain explained CDO
The last explanation was showed something called "Synthetic CDO"
The film starts with a coat from Mark Twain
It ain't what you don't know that gets you into trouble.
It's what you know for sure that just ain't so.
The story was traced back to the 1970's when banking could be said to be boring. There was a particular person, named Lewis Ranieri of Salomon Brothers, who is said to have created mortgage-backed security (MBS). These are a group of mortgages bundle together hence lowering the risk and raising the yield or profit. Now there was no problem as long as these MBS main contents are reliable, has been well validated and are verifiable. Initially they were well rated and did not have any problems. There was a scene with a sexy Margot Robbie who is an actress in a bubble bath scene and drinking champagne, she explained further that banks were making billions and billions off these MBSs. Of course, people started to get greedy and since there is a limited number of stable reliable working people who want mortgages, they started to put in riskier and riskier clients and bundle them up under the MBSs and the rating people drunk on money and conflicting interests allowed them or they still rated the MBS triple AAA. Dr. Micheal Burry picked up on this. Who is Dr. Micheal Burry?
Dr. Micheal Burry (portrayed by Christian Bale), in a previous life he worked as a neurologist resident then a pathology resident at Stanford Hospital. As at the time we meet him in the film he was working as a Hedge Fund Manager at Scion Capital. The way he was played by the actor, he looked as he was autistic and he was given the freedom to invest money by his investors. He made so much money for his investors that by the end of 2004, he personally was managing $600 million and was turning money away. What he noticed according to the film was an increasing number in deferments and frauds. He went through mortgage lending practices in 2003 and 2004, he correctly forecast that the real estate bubble would collapse in early 2007 when the adjustable rates would kick in and he believed that deferments will skyrocket. Then he bet against the banks, i.e sell short, which means that you place a bet that the price of the bonds (MBS) will fall below a certain price. In the film, they explained further that in the financial world are a lot of "financial instruments", going in the background. Now, people will ask, what will happen if the bank goes under and cannot pay the money. Micheal has foreseen that scenario and had got that bet insured by a third party. So, whatever the outcome he will get his money back. That is a credit default swap, of course, he will have to pay premiums unto its maturity, but he believed that was a small price to pay because he was so sure of his figures. People can place bets on the price of almost anything and try to predict whether the price will go up (Long) or down (Short), then they will sell the stock at a particular fixed price and make a profit. Before going on let's see how the film explained other complex "financial instruments". It is important because these link all other to another. Now chief chef Anthony Bourdain explained CDO
What is CDO? this is Collateralized Debt Obligation. Anthony as a chef he sells the best fresh fish in dishes and menus for a particular day. All the leftover fish and the stuff that is no so fresh is "repackage" and sold as a stew. This "repackaged" fish is still wonderful and sweet and even lasts longer. Hence, all the mortgages that did not make a triple AAA rating, like Bs, Cs, and even Ds are resold and repackaged into MBSs and are rated by the rating agency as triple A. They had Ninja loans (Offered to those with No Income, No Job, and No Assets - this ignores the verification process) This allowed a small national housing crises in the US to become an international economic disaster. Now there was nothing betting against the MBS as they were so considered to be stable. They had to create new Credit Default swaps against them, so Dr. Micheal Burry with the banks had to create new derivatives to charter for that scenario and he bet millions in various banks.
Here, we have a very beautiful Selena Gomez who is an actress and a talented singer. With a smiling Dr. Richard Thaler, father of Behavioral economics. They explain a synthetic CDO, using gambling at a blackjack table. If Selena bets $10 million on a single black hand. Her odds of winning are good and she is on a winning streak at the table and everybody wants to get in on the action. During the real estate boom prices were going up and up and people thought they would never go down. People who were watching Selena win at the table and thought that she won't lose would make a side bet on her winning. Hence, of $50 million if she continues to win, hence further expanding the market. Now, that is the first synthetic CDO and someone else will bet on that person winning. It will continue like that until it reaches exposure of billions and billions. In the real world that what actually happen people were seeing how great the MBSs were and were making "side bets", in this case buying long.
Word was said to get around that some "wacko" was betting against the banks. Although it is agreed in the various versions of how they got to know about it that the word got out and the great thing is that they did not "drink the Kool-Aid" and they too looked at the figures and thought there was something amiss. The last two groups, one was Charlie Geller and Jamie Shipley of Brownfield fund. Then the second group consists of Mark Baum in the film (Steven Eisman in real life), of FrontPoint Partners LLC, a unit of Morgan Stanley. After a presentation by Jared Vennett, two Financial Analysts at FrontPoint, they went to look at the houses. They found numerous deferments, people with multiple houses. Empty houses and instances of fraud on a large scale. People now wanting to sell their houses because they could not afford it. Someone even brought a house in his dog's name. There saw strippers and hookers who had multiple houses. They went to meet the mortgage brokers and they said "they sold houses to everybody" and 90% of these sells are subprime and at adjustable rates.
Word was said to get around that some "wacko" was betting against the banks. Although it is agreed in the various versions of how they got to know about it that the word got out and the great thing is that they did not "drink the Kool-Aid" and they too looked at the figures and thought there was something amiss. The last two groups, one was Charlie Geller and Jamie Shipley of Brownfield fund. Then the second group consists of Mark Baum in the film (Steven Eisman in real life), of FrontPoint Partners LLC, a unit of Morgan Stanley. After a presentation by Jared Vennett, two Financial Analysts at FrontPoint, they went to look at the houses. They found numerous deferments, people with multiple houses. Empty houses and instances of fraud on a large scale. People now wanting to sell their houses because they could not afford it. Someone even brought a house in his dog's name. There saw strippers and hookers who had multiple houses. They went to meet the mortgage brokers and they said "they sold houses to everybody" and 90% of these sells are subprime and at adjustable rates.
Jared is based on Greg Lippmann, a trader for Deutsche Bank after seeing that nobody was listening approached FrontPoint Partners LLC. He had inadvertently discovered Dr. Micheal Burry's credit default swap and looked further into it. He told his bosses of the impending doom but nobody was listening. He later wrote a paper on it and this was the paper read by Charlie and Jamie of Brownfield fund. Both had started Brownfield with a small portfolio of $110,000 from inheritance and borrowing. They were working from their garage and within four years their initial $110,000 became $30 million. They were small players in a big league they needed finance and hence approached a broker Ben Rickert. Got money they needed and reinvested it. Rickert is actually based on Ben Hockett, a retired banker who joined forces with his neighbors Jamie Mai and Charlie Ledley in establishing Cornwall Capital Management, an investment fund that struck gold with their bets against the housing market.
When the market began to see mild changes they were reassured by people like Alan Greenspan, who happen to Chairman of the Federal Reserve as at that time. In January 2007 the mortgage deferments went through the roof but the value of bonds went in the opposite direction they became much more valuable. The rating agencies all of them of the bonds were rated as triple A. And since their premiums went up, they began asking questions and after a shouting contest. Jarred reassured them, of course, the rates will go up, because the rating agencies, the SEC, the big banks were clueless. Charlie and Jamie of Brownfield fund also came to the same conclusion and decided to buy more credit swaps. They thought that it was not stupidity but fraud. And Jarred came out with the line "tell me the difference between stupid and illegal and I will have my wife's brother arrested". So to see how wrong or right they were they attended the American Securitization Forum in Las Vegas, the people they were betting against to gather information. After going to Las Vegas they found out that people were clueless and did not care about the Mortgage Bond Market. But when they wanted to bet against the CDO's they found that they were very expensive as if the market somewhere knew that they would collapse snd not as stable as rating agencies had claimed. Then Charlie and Jamie came up with the conclusion that if it was as worse as they were thinking they should bet against the solid triple-A mortgages because if everything goes down these will eventually fail as well. They were so happy after buying short that they were dancing in the hallway of the Las Vegas Caesar Place Hotel. Ben Rickert told them to show respect because they had just bet against the world's biggest economy and if they were right people lose their homes, jobs, pensions, retirement savings, and even people die, as every 1% unemployment goes up, an additional 40,000 die. All of the people the went to Las Vegas from Brownfield Fund and FrontPoint Partners was convinced that the collapse soon and the capitalism will fail.
Then in April, the market collapsed with the banks taking heavy losses. Then the fall of Lehman Brothers. Dr. Burry made a profit of $269 billion for his clients, Brownfield sold their stuff for $80 million, and of course, the banks were bailed out they used this money to pay themselves big salaries and lobby against regulation and reform. They blamed the failure of the economy on immigrants and poor people. Only one banker went to jail Kareem Serageldin from Credit Suisse.
When the dust settled $5 trillion in pensions, real estate value, savings and bonds were lost. 8 million people lost their jobs and 6 million people lost their homes in the US.
One scary thought is that Dr. Burry is back to investing in only one product ... Water
Then in April, the market collapsed with the banks taking heavy losses. Then the fall of Lehman Brothers. Dr. Burry made a profit of $269 billion for his clients, Brownfield sold their stuff for $80 million, and of course, the banks were bailed out they used this money to pay themselves big salaries and lobby against regulation and reform. They blamed the failure of the economy on immigrants and poor people. Only one banker went to jail Kareem Serageldin from Credit Suisse.
When the dust settled $5 trillion in pensions, real estate value, savings and bonds were lost. 8 million people lost their jobs and 6 million people lost their homes in the US.
One scary thought is that Dr. Burry is back to investing in only one product ... Water
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