With the release of The Massive Short, the big financial catastrophe finally gets its star turn on the big screen.
The film, which is based on Michael Lewis’s New York Times bestseller of the same name, chronicles the story of six contrarian traders who foresaw the housing crisis before almost anybody else. Their intelligence allowed them to profit handsomely while Wall Street institutions fell apart. Because of his bets, Michael Burry, who is played by Christian Bale in the film, made $750 million in 2007. 1
The film has received positive reviews and has been nominated for an Academy Award, but it’s much better if you know what’s going on behind the scenes. At the very least, it’ll be better when you discuss the film with your buddies later. So, in three easy questions, here’s your cheat sheet for The Big Short. Don’t forget to save the aisle seat for us.
Why is Wall Street Involved with Home Mortgages In the First Place?
The link between Wall Street and Main Street was largely formed when the finance industry invented securitization in the 1970s, which was then mass-commercialized by the now-defunct Salomon Brothers in the 1980s. 2 Securitization now accounts for over 75% of all mortgages issued. 3
This is how securitization works. Several hundred mortgages are initially pooled together by large financial organizations such as investment banks or quasi-government agencies such as Fannie Mae. They then offer bonds to investors using these assets as collateral once the mortgages have been pooled. When families pay down their mortgages each month, the money is paid to investors who bought bonds. The payments to bondholders change as homeowners pay down their mortgage principal early, renegotiate their mortgages, or default on their loans. Mortgage-backed securities, or MBS for short, are the name given to these bonds that investors purchase.
Finally, these MBS (each comprising hundreds of house mortgages) are pooled to form a “trust” that investors can invest in. The trust can be divided into tiers, with some tiers containing only the best quality MBS (those with the safest mortgages given to the least risky borrowers) and others containing just the lowest quality MBS (subprime mortgages issued to those with less than stellar credit scores). After that, investors can choose whatever tier they want to put their money in. Pension funds, for example, are required to invest exclusively in Aaa-rated bonds and only in the top tiers. Those with a larger risk appetite may opt for a Bbb-rated tranche in the hopes of higher returns.
Securitization is particularly good at two things: 1) It distributes the risk of an asset that is otherwise exceedingly dangerous (a mortgage). As a result, 2) more cash enters the housing market, making mortgages more affordable to homebuyers. 4 That’s why, even in the aftermath of the financial crisis, few people argue for major changes in the mortgage-backed securities market.
Short selling, collateralized debt obligations, and credit default swaps: what are they?
Short selling and collateralized debt obligations are two key themes in The Big Short.
When the value of an asset rises, money is usually made in the market. When the value of assets falls, however, there are ways for knowledgeable investors to profit, and short selling is one of them.
Let’s start with an explanation of what it means to “short” something on Wall Street. When investors believe the price of a security (a stock or a bond) will fall in the future, they will sell it short. This is how it works:
The short seller borrows the shares from someone else in the first step (the counterparty). The short seller will agree to return the borrowed stock to the counterparty in full on a future dateit might be a few days, months, or even yearsat the outset. Step two: after exchanging the shares, the short seller sells the borrowed stock on the open market. Let’s pretend the short seller sells one share for $100. Step three: fast forward to the time when the short seller must return the shares to the counterparty, which is indicated in the contract. The short seller takes the $100 he saved from the original stock sale and goes out and buys the same stock on the market at its new price, say $75. If the price has truly fallen, the short seller wins by returning the borrowed shares to the counterparty and profiting $25. However, if the stock price has increased, the counterparty wins.
This traditional approach of “shorting” is employed in finance every day, although it is a simplified version of the method utilized by the protagonists in The Big Short. They employed more complex items than stocks, resulting in a more complicated short. Furthermore, they repeated this sophisticated short several times, resulting in a truly “large short.”
What does it mean to short mortgage bonds?
The Big Short’s title refers to the trading/investment activity of shorting, or selling something short. Shorting somethingusually a financial security like a stockmeans borrowing it and selling it on the open market with the intention of repurchasing it at a lower price later and pocketing the difference as profit. When traders and investors believe a security’s value will fall, they sell short. It’s a wager that prices will decline.
What was Michael Burry’s strategy for shorting the housing market?
Burry served as a neurology resident at Stanford Hospital and later as a pathology resident at Stanford Hospital after graduating from medical school.
After that, he went on to create his own hedge fund. He had previously established a name as an investor by proving success in value investing, which he discussed on the Silicon Investor message boards beginning in 1996. His stock recommendations were so effective that he drew the attention of corporations like Vanguard and White Mountains Insurance Group, as well as notable investors like Joel Greenblatt. Burry has a very traditional view of what is valuable. “All my stock selecting is 100 percent predicated on the concept of a margin of safety,” he has declared on several occasions, referring to Benjamin Graham and David Dodd’s 1934 book Security Analysis.
Burry founded Scion Capital, a hedge fund, with the help of an inheritance and family debts, after shutting down his website in November 2000. He called it after one of his favorite novels, Terry Brooks’ The Scions of Shannara (1990). For his investors, he immediately made tremendous gains. According to Michael Lewis, an author, “The S&P 500 lost 11.88 percent in his first full year, 2001. Scion’s stock was up 55%. At the pinnacle of the internet bubble, Burry was able to earn these profits by shorting expensive tech equities. The S&P 500 lost 22.1 percent the next year, while Scion rose 16 percent. The stock market finally turned around the next year, rising 28.69 percent, but Burry outperformed it by 50 percent. He was managing $600 million at the end of 2004 and turning money down.”
Burry began focusing on the subprime market in 2005. He correctly anticipated the real estate bubble will burst in 2007 based on his examination of mortgage lending patterns in 2003 and 2004. His research into residential real estate values convinced him that subprime mortgages, particularly those with “teaser” rates, and the bonds backed by these mortgages, would begin to lose value as soon as the original rates were replaced by much higher rates, which could happen as soon as two years after initiation. As a result of this determination, he decided to short the market by convincing Goldman Sachs and other financial firms to sell him credit default swaps against subprime loans that he believed were vulnerable.
Burry faced an investor revolt during his payments for the credit default swaps, with some investors in his fund claiming his projections were wrong and demanding their money back. Burry’s analysis eventually proved correct: he made a personal profit of $100 million and a profit of more than $700 million for his surviving investors. Between November 1, 2000 and June 2008, Scion Capital earned a total return of 489.34 percent (net of fees and expenditures). Over the same time period, the S&P 500, usually regarded as the benchmark for the US market, returned little under 3%, including dividends.
Burry liquidated his credit default swap short bets by April 2008, according to his website, and did not gain from the 2008 and 2009 bailouts. He then sold his company to concentrate on his personal investments.
Burry stated in a New York Times op-ed on April 3, 2010 that anyone who closely researched the financial markets in 2003, 2004 and 2005 might have detected the mounting risk in the subprime markets. He chastised federal authorities for ignoring warnings from outside a small group of experts.
Burry relaunched his hedge fund in 2013, this time under the name Scion Asset Management, and began submitting reports as an exempt reporting adviser (ERA) active in California and approved by the Securities and Exchange Commission. He’s spent a lot of time and money on water, gold, and farmland investments. He’s stated, “Water that is both fresh and clean cannot be taken for granted. And it isn’twater is a contentious and political issue.” “The modest investing he still conducts is entirely centered on one commodity: water,” a statement about Burry’s current interest says at the end of the 2015 biographical dramedy film The Big Short.
With 13Fs filed from the fourth quarter of 2015 to the third quarter of 2016, Glimpses was offered into Scion’s portfolio, as mandated by the SEC when a fund’s assets exceed $100 million. On February 14, 2019, Scion Asset Management filed a new 13F, revealing Burry’s ownership of a number of large-cap stocks and $103,528,000 in 13F assets under management, slightly beyond the reporting requirement. Burry claimed in an email to Bloomberg News in August 2019 that there was a bubble in huge US firm stocks because of the popularity of passive investing, which “has orphaned smaller value-type assets abroad.” Alphabet Inc. ($121 million) and Facebook ($24.4 million) were the fund’s top investments in 2020.
According to a now-deleted tweet, Burry began shorting Tesla before or around early December 2020, and likely increased his short holdings once Tesla’s market cap topped that of Facebook. Burry warned that Tesla’s stock would crash like the housing bubble, claiming that “my last Big Short got bigger and bigger and BIGGER” and taunting Tesla bulls to “enjoy it while it lasts.” He was alleged to own puts on over 800,000 Tesla shares in May 2021. He announced that he was no longer shorting Tesla’s shares in October 2021, following a 100 percent increase in its valuation. He disclosed holding puts on the ARKK ETF innovation index managed by Ark Invest for over 31 million dollars in the second quarter of 2021.
What is the procedure for shorting a mortgage?
In real estate, a short sale is when a residence is sold for less than the remaining mortgage sum. For example, a homeowner may sell their home for $150,000 while still owing $175,000 on their mortgage.
What is the purpose of mortgage bonds?
Definition of a Mortgage Bond Mortgage bonds are sold by lenders to real estate investors who get interest payments on the loans until they are paid off. In the event of a default, an investor has a claim on the assets put up as collateral, such as a house, and can take possession of them.
What was Jared Vennett’s pay in the huge short?
For selling the swaps, Jared Vennett obtains a $47 million compensation. As a result of the financial setback, Mark Baum becomes more kind, and his crew continues to run their fund. After failing to sue the rating agencies, Charlie Geller and Jamie Shipley separate, with Charlie relocating to Charlotte to start a family and Jamie continuing to administer the fund. Ben Rickert is back in his quiet retirement. After public outrage and several IRS audits, Michael Burry closes his fund and now only invests in water securities.
With the exception of one trader, the personnel of the banks responsible for the crisis are exempt from any punishment for their acts. As of 2015, banks are once again marketing CDOs under the moniker “Bespoke Tranche Opportunity.”
What was Jared Vennett’s salary?
The director of Anchorman and Step Brothers adapts Michael Lewis’ great book into an unusual mainstream smash. Prepare for a slew of business jargon and a film that can’t determine whether it’s on a moral crusade or a quest for laughs, starring Ryan Gosling, Steve Carell, Brad Pitt, and Christian Bale…
The Big Short examines the events of the 2008 financial crisis from the perspective of Wall Street, which profited handsomely. Michael Burry, played by Christian Bale, is an odd and scruffy introvert who first detects many subprime house loans that are practically shite and are in danger of failing, causing the US housing market to collapse. Burry then spends almost $1 billion of his investors’ money in credit default swaps, all the while being mocked and chastised for his blunder.
Others soon find out what Burry is up to, including Ryan Gosling’s character, Jared Vennett, a banker (who also narrates the movie). Vennett is the most traditional cliché version of a banker; he’s only interested in making as much money as he can, regardless of how he does it. As a result, the rumor of a house collapse is music to his ears. Burry’s plan to short the housing market is subsequently presented to hedge-fund specialist Mark Baum, played by Steve Carell.
The American economy collapsed, 5 trillion dollars were lost, eight million people lost their jobs, and six million people lost their homes, and Jared Vennett made $47 million in commissions, Mark Baum’s team made $1 billion, and Michael Burry made $100 million for himself and $700 million for his investors.
The portrayal of Micheal Lewis’ book ‘The Big Short: Inside the Doomsday Machine’ by Adam McKay is a grower, not a shower. It takes an hour and a half for it to get fascinating, with the first half consisting of seeing how many huge words full of business jargon we can cram in before someone turns off. It’s also intriguing how the film switches genres halfway through; initially, it’s a black comedy in the vein of ‘Wolf of Wall Street,’ then it’s a righteous expose of Wall Street’s true corruption. However, we assume that this is similar to how those who were affected by the 2008 financial crisis felt.
Overall, we think the film has done a good job of using a number of well-known faces to present a serious and difficult story while also attempting to dress it up in a fun and sexual way… though not quite successfully.
After two years of skepticism and threats from each of his investors, Michael Burry sends emails to each of them telling them how much money he’s made. Then he closes the firm – a movie-style fist pump into the air.
Mark Baum’s (in real life Steve Eisman) ongoing sanctimonious angst that makes him so angry with the system and the world, but the entire while is making the decision to bet against the banks he works for and screwing the poorest people in America is an overall worst factor. Not to add that he does it in a shittone. The worst part is when he’s having to make a difficult decision: should he sell and profit billions from the crooked system he despises? Of course he does, of course he does, of course he does, of course he does
Jared Vennett: Something fishy is going on here. This is very personal. I’m not sure if I’m financially inside of you or not.
How can I pay down a 30-year loan faster?
Even if you have a 30-year mortgage, you have choices for paying it off sooner. You can choose for biweekly installments instead of monthly payments, which means you’ll make one extra complete payment during the year. You can also make a greater payment each month if you choose. Ensure that your extra payments are applied to your principal sum by contacting your lender.
One word of caution: Before taking this method, double-check that your mortgage does not have a prepayment penalty. Typically, such a penalty is imposed only if you pay off your full mortgage early. However, if you make tiny payments toward principal ahead of time, you may be charged a fee.
Will I save more money with a 15- or 30-year mortgage?
A 15-year mortgage will surely save you more money in the long run. Your total interest costs as well as the total amount paid will be significantly reduced. However, choosing a 30-year mortgage saves money on your monthly payment in the short run.
What other mortgage loan terms are available?
While 30-year and 15-year mortgages are the most popular, there are other options. Some lenders may allow you to choose any term between eight and thirty years. You could even be able to find a mortgage with a 40-year term.
How else can I lower my mortgage payment?
The length of the mortgage isn’t the only factor to consider when determining the size of the monthly payment. Making a higher down payment, boosting your credit score, or looking around for the best interest rate can all help you lower your monthly mortgage payment.
Can I refinance to a 15- or 30-year mortgage?
Yes, this isn’t simply a decision you have to make when purchasing a new home. You can also refinance your mortgage to a 30-year or 15-year term. If you currently have a 30-year mortgage, you can refinance to a 15-year term at a later date.