Assignment: The Big Short
-How the Subprime Crisis Happens and the Reasons Behind.
The Big Short is a movie introduces the underlying reason for the subprime crisis by
showing how three groups of people get benefits from shorting the collapsing
mortgage market. The fraudulent processes behind authoritative departments and
specialists are appealing. Banks are spread themselves windbaggery, in the
meanwhile, covering up the truth. Walt Street is filled with rooks, hypocrites, and
apes. No one is recognizing the approaching volcano except for a floppy hedge fund
manager, an investor who works at a bank and is money-stink, and two fearless
youngsters. They see through the whole fraud and make the correct predicament of
economic depression. The significance of it in both human nature and financial
operation are worth considering about.
Michael Burry is the forerunner of making Credit Default Swap on the mortgage
market, which means to bet against. He finds the truth by confirming the actual
composition of CDOs in person and understands how unstable they are. Micheal
predicts that the mortgage market is going to collapse in the second session in 2017
and asks several banks to make CDS to short the market. He buys 1.3 million swaps
which spite his boss, Lawrence. By an occasion, Jared Vennett, the executive in
charge of global asset-back security trading at Deutsche Bank, hears about
Michial’s actions and buy some swaps as well. And he accidentally calls Mike Buam
and convinces his fund group——FrontPiont to join him so that he could get the
commission. Mark and his team confirm Jared’s words by doing a series of surveys
and buy some swaps. In the meantime, two young investors, Charlie Geller and
Jamie Shipley accidentally find the proposal of Jared’s prediction for the mortgage
market after failing to get the ISDA, which is the permission. They buy a lot of swaps
as well. They ask Ben, a retired banker to help them get ISDA. After nearly two
years, because more and more people are unable to afford the loan, the value of
subprime mortgages is declining while the CDO is increasing, which is incredible. All
three groups of people are getting frustrated and becoming suspicious on their way.
Rating agencies are refusing to lower credit ratings of CDO’s as well. Just then they
attend a conference which is about pretty much everything. Mike meets a CDO
manager, Wing Chau, then he understands how CDOs and synthetic CDO work, and
forecasts the collapsing of the global economy. After that, he buys all of Wing’s
swaps. In the meantime, Jamie and Charlie short the AA mortgages. In the end, a
ruin happens. Jared and Michael get tons of money. Mike is hesitated about selling
swaps because of his central office, Morgan’s stupidity: someone else shorts the BB
and BBB mortgages but sells an enormous number of AA and AAA swaps. Neither
his clientele’s investments are threatened nor the crooks are escaping from the
execution. Eventually, he keeps holding the swaps and doesn’t sell until the very last
minutes. Although people get to know the truth in the end, poor and immigrants are
certainly blamed nevertheless.
The subprime crisis is unrestrained gambling. What differentiates them is whether
confirming the truth or not. So how does the fraud work? Firstly, the MBS comes
from a banker, he proposes to combine a variety of mortgages together, to make
more profits. They select stable house-owners at first, but there are not much. So
they create CDO. CDOs are explained as a package of thousands of mortgages with
an over 90% AAA rate, They are popular because people believe that everyone pays
their mortgages, therefore, it is definitely trustful. However, CDOs are actually filled
with subprime mortgage loans for more than 95% which is an incredible proportion.
According to Mike and his team’s survey, they find that land agents sign contracts
without paying attention to income or job stability. Poor are selecting adjustable
loans which means loans are depending on the financial situation. Once the houses
are not rising in price, interest rates are increasing and become unaffordable.
Therefore the whole mortgage market is built on bubbles. Bonds are no more stable.
As for Rating agencies, they’re just selling ratings for profits and prevent customers
from going to their competitors. As time goes by, the value of subprime mortgages is
decreasing. Ironically, the bet on the mortgage is more valuable than itself. That is
called synthetic CDO, or CDO square. It is similar to a chain of gamblings. The
investors are confident about CDO because of its excellent performance, which is
misleading. The ignorance of the truth attracts more and more apes and triggers to
an atomic bomb, with a drunk controller holding the remoter. Finally, when the
collapse happens, the government is blaming the poor and a few scapegoats. What
an ironic system it is!
The destruction causes catastrophic explosion to the global economy. The creators
of the predicament are neither the unfortunate scapegoats nor dark-minded bankers.
They are all the participants in this gambling. Selfish agents, sign the contrasts
without caring for customers’ income. CDO managers are acting in collusion with
bankers. Rating agencies care only for profits and competitors. The most hilarious
part of the tragedy is, thousands of apes are following the authorities without thinking
or observing. They are called “investors”. The reality is never as perfect as the
appearance, and sometimes it is even adverse to the consequences. It is hard to
estimate how fake and greedy humans are, it is important to keep an eye around
nevertheless. The movie says that ：“ The truth is like the poetry, but most people
hate poetry.” Because they’re too lazy to strengthen themselves and too proud to
admit their weakness. That’s the cause of the subprime crisis and economic
depression—— human nature.