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I'd agree that the US housing and derivatives markets are in a much better position than in 2007-2008. Atleast people who are getting mortgages now have some f
by chollida1 10y ago
I'd agree that the US housing and derivatives markets are in a much better position than in 2007-2008. Atleast people who are getting mortgages now have some form of documentation, and risk manages are being asked to do their jobs.
The crisis now is that, and this is just my opinion, low rates are here to stay. with the amount of money in the system, people are being priced out of homes and as time goes on the amount by which they are priced out in the big cities is only going to grow.
As an aside...
I'm not a lawyer but I've heard people say My cousin Vinny is the most accurate court room movie ever. In a similar vein, I'd nominate the Big Short as one of the more accurate wall street movies ever made.
It showed the lone wolf who not only saw the coming crash, this was far and away the easiest part, but figured out how to profit form it by getting the banks to write him a CDS.
The two smart kids working out of their garage that were smart enough to succeed despite all their mistakes.
The hedge fund who did an incredible amount of due diligence, going to properties, knocking on doors, talking to people inside the industry to put together the pieces that no one else could.
The wall street sales guy who sold the CDS knowing that it might bankrupt his company but figured he'd make a killing on his commissions long before that happened.
And the most accurate part of the movie was that it showed the anguish that each of these people went through. They'd seen something no one else had, been right about it, had the event happen and even then everyone else continued to plug their ears and pretend nothing was going on while they continued to bleed money each month.
It really did a good job of showing that you can be right about everything and still not make money if the rest of the market continues to act insane.
In 2007 there really was a sense that people knew things were way out of hand but everyone was thinking, "If I can just get one or two more years on the bonus cycle, I'll be able to get out". To be fair, this type of thinking probably ins't going away anytime soon.
- martincmartin 10y agoHonest question: how many of them reverted to mean afterward [0], that is, thought they saw other things coming, bet on them and were wrong about as often as everyone else? John Paulson wasn't featured in the movie, but fit the bill. But I don't know about those in the book/film. [0] https://en.wikipedia.org/wiki/Regression_toward_the_mean https://en.wikipedia.org/wiki/Regression_toward_the_mean
- talmand 10y agoIf I remember correctly one of them closed down his fund because he was stressed and tired of his clients always second guessing him through the whole thing. Then begin to second guess him again on his next decisions despite being right the first time and bringing in hundreds of millions of dollars in profit.
- cmdrfred 10y agoI believe he is investing in water now if the end of the film is correct. Let's hope he isn't right twice.
- talmand 10y agoWell, there are interesting reports out there about water and the companies involved with that commodity.
- mercer 10y agoCould you elaborate?
- talmand 10y agoMy bad, missed your response. There are the occasional stories about companies that draw water from a local community for their own purposes, usually for retail, when that community would likely be better off without that relationship. In some cases there are shenigans involved and complaints over the contracts.
- cowardlydragon 10y agoThe Christian Bale character closed his fund to withdrawals from investors as the shit was hitting the fan but the big banks were trying to keep it under control, thus preventing his default swaps from paying off. He was losing money as the banks tried to stall the inevitable. A couple months later he made everyone who was suing him to get their money millions of dollars.
- komali2 10y agoI'm still confused by the CDS bit. Is there a good eli5 article on it? I've already checked the eli5 subreddit and couldn't find anything specifically on the mechanism that allowed shorting.
- mcnees287 10y agoIt's just insurance. One side pays the other side if a certain outcome occurs. In exchange for protection from the outcome, the side seeking protection pays a fee.
- roywiggins 10y agoIt's more like buying insurance on someone else's house, when you know they are a meth lab and the insurer doesn't.
- sosborn 10y agoIn that case the insurer should do their due diligence before taking the bet.
- maxerickson 10y agoA hand wavy analogy is that a CDS is bankruptcy insurance. So the guy in the movie got the bank to write him an insurance policy on the mortgages (really mortgage derivatives) that other people held. When those mortgages failed, the policy paid out.
- maxerickson 10y agoI forgot the eli5 part. Let's say you have a little sister. It's been a little while since she screamed about her stuffed frog, but you think she is going to do it again soon. You come to me and say that I can have one of the cookies out of your snack every day if I agree to give you a whole bag of cookies next time your sister screams about the frog.
- chollida1 10y ago
- huherto 10y agoNice comment. Food for thought. How big was the risk that they took ? Surely they knew that the market was insane. But would they have lost a lot of money if the market was insane for a long time ? I saw the movie but I don't remember a lot of the details. I was just trying to follow.
- lmm 10y agoIIRC from reading the book a year or two ago, one of them's bosses were hounding him for the premiums he was paying on the insurance-like contracts he bought, which was something like $25m/year. When the crash happened they bought in ~$1b. Had there not been a crash he would have got nothing (the contracts would never have paid out) and that $25m/year would have been money down the drain.
- talmand 10y agoShorting is a risk. Shorting with big money is a big risk. In this case though, my impression is that certain people who actually looked at the data knew it would happen. Not like "I think it will happen", it was "it will happen sometime in this month of this year" kind of thing. Because they knew when those stupid ARMs would kick in with their adjustable rates on top of the obvious number of failed mortgages. The risk wasn't that it would not happen, it was that high level people in finance and government would take steps to keep things moving along which would prevent them from cashing in. There was a great deal of fraud throughout that whole thing propping up the failed system.
- roywiggins 10y agoThe other risk was that the entity on the other side of the bet would be wiped out in the crash and not be able to pay out.
- talmand 10y agoThat was part of the problem in delaying them from cashing out.
- hammock 10y ago>I'd agree that the US housing and derivatives markets are in a much better position than in 2007-2008 Could they have been worse?
- soperj 10y agoPretty much everyone is saying that interest rates are going up in the US and are going to go up soon. Alan Greenspan just came out today saying people are going to be surprised how quickly they go up.
- lps41 10y agoWhy does Alan Greenspan's opinion have any weight? He is not in any kind of position to have control over rates.
- soperj 10y agoNo, but since he worked in that position for years, he might have some kind of insight?
- talmand 10y agoInsight on how to be incredibly wrong on a housing bubble?
- soperj 10y agoEasy to say in retrospect. Wrong like nearly everyone else.
- erichocean 10y agoOr you could say, nearly everyone else was wrong as a result of him being wrong.
- axlprose 10y agoSaying "nearly everyone" was wrong and blindsided by it is a bit of a stretch. Not everyone that saw it coming profited from it big like the now fabled protagonists in The Big Short. But to people who chose to pay attention to it, the issue was known and well publicized ahead of time: https://youtu.be/tZaHNeNgrcI https://youtu.be/tZaHNeNgrcI https://youtu.be/kFd8YluIVG4 https://youtu.be/kFd8YluIVG4 The key to 'seeing it coming' of course, is to first willingly accept the possibility that something might happen, and then actually look into it. The issue was that many people were just not entertaining the possibility at all, and therefore not bothering to look into it. The information was all there for anybody to see, but this was a case of people missing the gorilla in the room because they were too busy paying attention to the game[0]. [0] http://www.livescience.com/6727-invisible-gorilla-test-shows-notice.html http://www.livescience.com/6727-invisible-gorilla-test-shows...
- s_q_b 10y agoThe MIT Blackjack team wrote a good piece on the housing crash, paying particular attention to the market distortion caused by short-term rewards. https://yourmortgageoryourlife.wordpress.com/2009/01/15/the-real-cause-of-the-financial-crisis-an-mit-blackjack-team-perspective/ https://yourmortgageoryourlife.wordpress.com/2009/01/15/the-...
- eli_gottlieb 10y ago>And the most accurate part of the movie was that it showed the anguish that each of these people went through. They'd seen something no one else had, been right about it, had the event happen and even then everyone else continued to plug their ears and pretend nothing was going on while they continued to bleed money each month. It really did a good job of showing that you can be right about everything and still not make money if the rest of the market continues to act insane. You mean: it showed the part where the assholes had grabbed control of the government and rigged the market, pointing a gun to the head of the world economy, so that their idiotic bets would pay out by force, thus penalizing everyone who had bet on the facts, right?
- spitfire 10y agoMargin call with Kevin Spacey and Zachary Quinto is another excellent portrayal of the crash. It's set inside a fictional unnamed bank that's securitizing these mortgages when thinks go pear shaped.