Saturday Finances—The Big Short

Loved-loved-LOVED this movie!


A group of high financiers out-maneuver the big banks prior to the 2008 mortgage bust

I rented The Big Short last night.  

It scared me, made me laugh out loud, and made me a little less secure about personal investing.  But, as the movie points out over and over again...the mortgage bubble started at least three years before it collapsed.  For anyone who was paying attention, there was plenty of warning.

My take-away:  Pay attention.  

The more you know about how things work, the more secure your investments are.  

The Big Short is based on the notion of short selling.  

What is short selling?

When you short sell a stock, your broker will lend it to you. The stock will come from the brokerage's own inventory, from another one of the firm's customers, or from another brokerage firm. The shares are sold and the proceeds are credited to your account. Sooner or later, you must "close" the short by buying back the same number of shares (called covering) and returning them to your broker. 

If the price drops, you can buy back the stock at the lower price and make a profit on the difference. If the price of the stock rises, you have to buy it back at the higher price, and you lose money.  You can be forced to cover if the lender wants the stock that you borrowed returned.

The guys in the movie were not short-selling stocks.  They were short-selling mortgage-backed securities, which were bonds made up of thousands of bad home loans.  

Normally, people will not default on their mortgages because a.) they don't want to lose their homes, and b.) banks usually do a pretty good job of making sure that potential buyers can afford to make payments for the duration of the loan (e.g a 30-year mortgage).   

But between 2004 & 2006, banks were handing out mortgages to pretty much anyone who asked, and there was a huge catch.  These were adjustable-rate mortgages with balloon payments after 3 years, a catch that caused mortgage delinquencies to soar after interest rates rose and buyers were unable to refinance. 

Meanwhile, investment banks saw an opportunity to package these crap-based securities and trade them as CDOs, or collateralized debt obligations.  In the minds of investors, mortgage-backed loans were unlikely to default, and the packaged bonds came with inexplicably good credit ratings.

Investors were lulled into a false sense of security by these good ratings.  And, the SEC who was supposed to be policing those ratings ignored the issue.

The movie does a good job explaining the basics.

This movie won an Oscar for Writing, Best Adapted Screenplay & was nominated for Best Picture, Best Supporting Actor, Directing & Film Editing.

Warning: Let the eff-bombs fly!

• have • fun • movie • night •

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