The Big Short Review
The Big Short
23 Dec 2015
Behind the Scene and other Major Plot Points
Some finance questions from a newbie
Steve Carell and his colleagues shorted mortgage bonds, and in the end one of his colleague tells him all the time to sell. Doesn’t he really mean buy back theSTOCKS to cover their shorts? And why is it so important for his colleague that he sells/covers?
Also in the end there is a conference where Steve is with this older guy sitting there. As I recall he had bear stocks, which went down during the conference. If theMARKET would go down, then bear stocks should go up, right?
I think the premise of the entire concept of “SHORTING” was that they purchased Payable INSURANCE Policies (called “Credit Default Swaps (CDS)”, on huge private mortgage bonds & instruments called “Collateralized Debt Obligations (CDO)”.
When those mortgage CDOs decreased under a certain amount, it was in their favor coz they get to COLLECT on the insurance (CDSs) that they purchased against them. And, then later, their CDSs would be worth a lot coz others would want to get in. In other words they’d actually PROFIT big time from selling when the Mortgage Bonds & Securities decreased in value.
The concept was initially discovered by Christian Bale’s character Michael Burry. FIRST he noticed that it was weird that even though the tech industry tanked, the mortgage industry stayed strong, and mortgage CDOs stayed at AAA ratings. At the time only Burry correctly analyzed that this was a false scenario and huge mistake and, if he worked his cards right it would pay off big time.
SECOND, he noticed that millions of people who were given subprime mortgages were not very financially astute or responsible, often late in payments, etc, in a few years when their interest rates would increase, or loans due, many would default, and of course Burry was right again. Baum’s people went to Miami to investigate this and there were communities of $600k +/- houses that people simply abandoned. Small Mortgage companies didn’t even do income verification on home buyers, and sold SUB-PRIME Adjustable-Variable Rate Mortgages to immigrants, strippers, etc, and got paid a lot more than just normal mortgages. WHY? Coz the Big Banks immediately and IRRESPONSIBLY gobbled up the sub-prime mortgages without even inspecting them, and sticking them into CDOs.
So Michael Burry told the banks that he’d purchase $100s of millions $$$ in insurance (CDS) against their mortgage holdings, but if they ever experienced a LOSS, he would PROFIT. All the banks laughed at him because THIS SCENARIO NEVER HAPPENED BEFORE, agreed to his offer, and they actually CREATED the insurance products (CDS) for Burry to buy, and pay millions per month on insurance premiums.
Later, Ryan Gosling’s character Jared Vennett got wind of what Michael Burry did, and everyone thought he was crazy (just like Burry), and then later BY MISTAKE got a meeting with and introduced the concept to Steve Carell’s character Mark Baum and his team.
Doon’t forget that Burry, Vennett, Baum, etc, paid $10s of MILLIONS per month on Insurance Premiums which scared the sh*t out of all their investors, which is why everyone thought that Burry & Vennett were pretty much nutzo, until Baum did lotsa homework, confirmed & validated the housing bubble.
After that, the other 2 guys (Charlie Geller & Jamie Shipley) who worked with Brad Pitt’s character Ben, heard about Jared Vennett’s plans, so then they also got into the same scheme, BUT they purchased their CDS against DIFFERENT CDOs – the AA rated ones – which Burry, Vennett, Baum, and most others ignored, and did not insure via CDS.
So finally, when the mortgage bond markets & banks started hemorrhaging & tanking, ALL of the main characters as stated above were PROFITING, everyone in the MARKET was desperate to buy THEIR holdings, thereby increasing demand, consequently price, and so they SOLD to experience the extreme profits that they did. If you might remember, Brad Pitt was shown sitting in a pub in England, and sold Geller’s & Shipley’s CDSs worth a face of value of $200 million, for a selling price of $80 million.
No coz, (I THINK AGAIN), another premise of the movie was that Bear Stearns was HEAVILY involved in the subprime mortgage market, and had NO CLUE that their holdings included so many BAD MORTGAGES in the billions of dollars $$$. Bear Stearns position was EXACTLY what the above characters bet on.
Due the fragility & hemorrhaging of the ENTIRE banking industry in general, other FINANCIAL markets, people defaulting on mortgages, AND especially, the fact that Bear Stearns held billions in bad mortgages, their stock plunged, they went into bankruptcy, and JP Morgan Chase took them over.
A LOT OF THIS BUBBLE can be blamed on Republicans and George W Bush who were in power for 8 years and allowed such extreme DE-REGULATION of the banking & financial industry.
I am just curious about what is the difference between CDS and “short selling”, I remember the characters mentioning “shorting” a few times. What would that be in reference to?. Is that same as CDS?
“Shorting” is the abbreviated form of “short selling”. The concept is based on predicting that the value of stocks or securities or COMMODITIES or in the case of this movie — MORTGAGE BONDS — will fall, or decrease in value, and when they do their shorts pay off profitably.
No one in history ever “shorted” Mortgage Bonds before, Burry was the first, and no FINANCIAL products existed for this, so the banks had to MAKE THEM (i.e. shorts on Mortgage Bonds) FROM SCRATCH for Burry to buy, which are called Credit Default Swaps (CDS)
Book by Michael Lewis
Second Michael Lewis book Brad Pitt has produced and appeared in, the other being Moneyball.
Confused about the Ending
Lets start with the most transparent protagonist, the autistic:
OK, so he invested like 1.x billion way at the start, at the end it looks like he only about doubled his money with a listed profit of $2.69 billion. Why is this so low? They were talking 10-25 times the initial investment, this is a tiny tiny fraction of that. And really not that amazing of a return over the couple of years it took him to cash in.
No, Burry didn’t “invest $1.3 Billion”, he INSURED $1.3 Billion of “Collateralized Debt Obligations (CDO)” made up of crappy Mortgage Bonds, by paying INSURANCE PREMIUMS on “Credit Default Swaps (CDS)”. The CDS premiums cost his fund Millions $$$ per year to stay current, coz the value of the CDOs stayed high due to a corrupt & fraudulent market. When the CDOs finally (and correctly) got tanked, he sold out, and his fund increased to $2.69 billion.
Then there is the team with the outspoken blunt leader:
I am not sure how much they invested total, but they started with $50 million and went on to buy more at least once. Apparently their parent company owned a bunch of the mortgages and was going bankrupt? So they needed to sell their CDSe before that happened? Is that how that worked? But I did not get the implication that they were investing with their own money, and that their company as a whole was going bankrupt, so how did they get any money out? Did they actually make a billion, or did they just get like a 5% bonus on that billion dollars (the rest going to a bankrupt company)?
Baum started with $50 million in CDS, but then after the trip to Las Vegas he INCREASED it by $500 million. They undertook the exact same concept/scheme as Burry.
Morgan Stanley is not exactly the “Parent Company” of Baum’s INVESTMENT COMPANY FrontPoint. They’re a separate company working under the umbrella of Morgan Stanley who YES, held billions in crappy mortgages, so in part it would be them paying Baum if the CDOs failed. The CDSs are legally binding but they wanted to play it safe JUST IN CASE any banks or financial firms went completely bust, so they sold early enough to profit heavily, but Baum waited until the 11th hour coz it’s also a vengeance kinda thing for him.
None of the main characters use or invest “their own” money ~ they manage INVESTMENT FUNDS so they have a lot of cash at their disposable, and again, they use the cash from the funds to pay INSURANCE PREMIUMS on CDS, which is not exactly “investing” lump sums. When the VALUE of the CDOs decreased, the value of their CDSs increased, and that’s how they made billions. Baums fund increased to $1.5 BILLION.
And finally, the two plus the ex-broker:
In the beginning they say they work with about $30M, lets assume they invest most of that. At the end they have the broker sell off what appears to be all of their CDSes at around 70-80 million. Again this is a profit, but several times lower than they were estimating. And way way lower profit margins they they have been used to getting
Again, your getting investing ” mixed up with paying premiums on CDS. Near the end when the market started crashing Charlie Geller’s & Jamie Shipley’s CDS were worth $200 million. If you might remember, Brad Pitt was shown sitting in a pub in England, and sold Geller’s & Shipley’s CDSs worth a face of value of $200 million, for a selling price of $80 million. They didn’t really give sh*t that Brad Pitt sold it for a lot less than the face value ~ they still became multi-millionaires.
Morality story and good fun
very thought provoking. Is the UK government doing the same thing with its support for home ownership at the cost of rentals for lower paid people and people on benefits. That was the first thing that occurred to me. I liked Steve Carroll’s character which is the nearest thing to moral sense in the film. None of the characters are likeable because they are all basically MAKING out of the collapse of the world economy but it is entertaining and it is a morality story. I did not realise how implicated the ratings agency and the government were – but then again – how could they fail to be so
People responsible for the crash in order of guilt
The movie was pretty lame on where the problem originated. – it intimated common people who don’t pay attention and watch too much trash TV and the greedy business people, which is pretty general. So here is my list:
1. Greenspan and repeal of Glass–Steagall Act and his naivety about housing prices.
2. Politicians like Barney Frank(D) and Chris Dodd(D) of the House Financial Services Committee and a longtime supporter of Fannie and Freddie who encouraged it instead of regulating.
3. Mortgage companies like Countrywide ( Angelo R. Mozilo)that did wholesale bad loans without due diligence.
4. Credit agencies Moody’s and Standard and Poor’s ignorance/complicity not downgrading securities with bad loans.
5. Big Wall street banks that invented complex securitization made possible by computers and math geeks. – who in the end paid for it in stock price
6. People who took advantage of housing bubble on the way up but walked away from home loans on the way down.
Won an Oscar for best adapted screenplay
Who is the target audience?
Anyone interested in good acting! I found it very funny, wildly original in its storytelling, and absolutely riveting. They managed to get some A-list award-winning actors to play even the smallest roles, and everyone turned in excellent performances. Also, I did not understand what happened in 2008 AT ALL, except that it had to do with sub-prime mortgages, but this movie gave me the first glimmer of understanding I’ve had…..
RT/Meta Critic Review
Entertaining, funny, and smart! This movie combines all the right elements to make an intense situation into a fun movie! :-)(Totally Epic HD/Meta Critic)