‘Big Short’ Michael Burry Housing bubble in 2008

How did Michael Burry see the housing bubble coming in 2008?

Americans are borrowing more, saving rarely, and spending the extra cash they preserved during the outbreak. These patterns might portend a long-term drop in consumer expenditure. Michael Burry issued a warning on Friday. And degrade corporate earnings.

The Big Short supplied some of the preliminary research” famed contrarian investor Michael Burry. That served as the foundation for his $1 billion wagers on the US housing bubble in the mid-2000s.

Burry pointed out that there was an interest-only mortgage. As- a lien on securities between 50% and 70%, which- was equivalent to 20% of the total. These were associated with cash-out refinancing, in which homeowners swapped their smaller mortgages for larger ones. Between 30 and 40 percent of the borrowers in question had fair FICO credit scores below 600.

According to Burry, between 15 and 25 percent of mortgage loans had loan-to-value ratios higher than 90 percent. He said that 40% of the loans had second liens, which meant that if the borrower declared insolvency, it would pay another debt off first. The spread on “BBB” rated securities was 150 bps, compared to 300 bps a year ago. He emphasized, implying that investors did not consider the products to be dangerous.

US personal savings decreased to 2013 levels, and the savings rate to levels last seen in 2008. While back then, the growth of revolving credit card debt was record-breaking. Despite all the trillions of dollars that were poured into his lap, he tweeted at the pre-COVID peak. A consumer recession and new earnings problems are on the horizon.

The Big Short Explained

The Big Short, an Oscar-winning movie from 2015, won. It is- based on the best-selling book of the same name by Michael Lewis. The life stories of various American financial experts who expected and benefited from the bursting and subsequent burst of the housing bubble in 2007 and 2008 are the primary subject of the Adam McKay-directed film.

Regardless, The Big Short is a character-driven story. It does not focus on the circumstances leading to the collapse of- the subprime mortgage market. But also the conflicting emotions of several guys who correctly predicted the catastrophe (either based on real men or based on real people). Brad Pitt, Ryan Gosling, Steve Carell, and Christian Bale star in the film.

Michael Burry, manager of hedge fund Scion Capital, is one of those men (Christian Bale). In 2005, Bury worried that the growing US housing market was an asset bubble that had increased riskier loans. Burry invents a brand-new financial product called a credit default swap that will enable him to short the housing market or sell holdings under the expectation that home prices will decline.

When- financial institutions and lenders claim that the housing market is stable. The- audience members of the acquittal are angry and scared. As he continued to produce his short plays, the cost kept rising. He places restrictions on- withdrawals from the fund in response to his money demands, which further upsets his clients.

In the meantime, Burry’s design of credit default swaps is- accidentally discovered by Deutsche Bank executive Jared Vennett (Ryan Gosling). He sells them after agreeing with Burry’s market analysis. Mark Baum, a manager of hedge funds, is one of his clients (Steve Carrell). A significant amount of real estate growth is all out of proportion. To- the industry’s fundamentals are- being driven by financial institutions’ hunger for these instruments.

Baum draws the same conclusion as Burry and Vennett: the housing bubble will eventually burst. It might cause the US economy to collapse. He bets against the financial industry. Based on real-life hedge fund manager Steve Eisman, Baum was- created. Greg Lippmann, a former bond salesperson at Deutsche Bank, served as the inspiration for Vennett.

Two young investors, Charlie Geller (John Magaro) and Jamie Shipley, are the subjects of a third plot line (Finn Wittrock). Who finds a paper Vennett wrote about credit default swaps? They ask retired banker Ben Rickert for investing guidance (Brad Pitt). Shipley and Geller make a series of profitable wagers against mortgage-backed assets. They will profit from their transactions when the housing market finally collapses.

But Rickert criticizes them for making money from the suffering. Middle America has experienced this because of the mortgage crisis. The moral hazard associated with CDOs has left the pair feeling quite discouraged. After learning that credit rating companies and investment banks teamed up to hide risks and maintain investment pricing. They eventually pursue to sue the rating agencies for their inaccurate evaluations of mortgages and mortgage-backed securities.

Burry ends up giving investors returns of about 500%. Who stuck by him during the downfall of the housing market.

The Big Short’s Design Decisions

A two-hour film cannot adequately explain financial jargon or the timeline of the financial crisis to a lay audience. The Big Short uses colorful, everyday language and even- humor to emphasize his point. And describe the sophisticated financial tools and mechanisms, such as collateralized debt obligations (CDOs). And credit-default swaps and installments of mortgage-backed securities. That helped crash the world economy.

Another scenario provides viewers with a visual aid to help them comprehend a passage. To show how tranches function in mortgage-backed securities (MBS). Such as collateralized mortgage obligations, Ryan Gosling removes blocks from a Jenga tower (CMOS). Gosling shows how the best-rated bonds at the tower’s top cannot stand when the lesser-rated securities fail. And are taken out of the base by removing blocks from the tower’s lower section.

In a scene when actress Selena Gomez plays blackjack for occurrence, the movie explains why the CDOs had such a significant impact. With the help of economist Richard Thaler, she describes how larger side bets on Gomez’s blackjack hand work. That is fantastic when she wins, an allegory for an expanding home market. However, such side bets cause a domino effect when Gomez loses the hand. Or when property prices decline, massive losses result, both for the economy and at the table.



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