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Nice 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

by huherto 10y ago

Nice 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 ago
IIRC 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 ago
  Shorting 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 ago
    The 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 ago
      That was part of the problem in delaying them from cashing out.
  - sliverstorm 10y ago
    "take steps" kind of sugar coats it, from the film it sounds like the banks strongarmed the ratings companies to lie about the quality of the derivatives as the ARMs folded.
    - talmand 10y ago
      That was my impression from sources outside the film as well. Like it was stated in the film, "if we rate them lower they'll go down the street to our competitor".
  - lmm 10y ago
    > Shorting is a risk. Shorting with big money is a big risk. Calling it "shorting" suggests the downside was unlimited (as it is when shorting equities). That wasn't the case for this trade.
  - gozur88 10y ago
    It was not difficult to see the housing bubble would burst. The problem is you can't make money knowing that without getting the timing mostly right. That's the hard part.
bluGill 10y ago
Yes, but unlike a normal short their loss was limited. They had (IIRC) a 7 year contract to pay $25million/year unless things went bust in which case they get paid $1 billion. So their worse case was a $175 million loss, their best case was a billion gain. If you have the money the potential return on invest is great. I'm about half way through the book now, but I don't have it handy at the moment to look up the real numbers though.
- wahern 10y ago
  By that measure the returns on a lottery ticket is magnitudes better. The big question is the likelihood of the gamble paying off. For a lotto ticket that's easy to figure. Trying to time the collapse of a bubble? If that was easy bubbles wouldn't exist. Maybe it's implied that 7 years was clearly more than enough time, but that's only clear in hindsight. Now some of the winners of the collapse seemed to have had a firm grasp of the situation. But how would _you_, as an investor, know that? How do you measure that? Warren Buffett can write all the books in the world for as long as he likes, but successfully communicating his knowledge, his strategies, his intuition, has proven fairly difficult. It's probably not even possible because Warren Buffett probably doesn't 100% understand his strategy. Likewise for other consistently successful people. If they were capable of communicating it, there'd be many more people like them. It's like the old adage, if you code to the best of your ability, by definition you're not capable of debugging it.
  - bluGill 10y ago
    > The big question is the likelihood of the gamble paying off. For a lotto ticket that's easy to figure. I agree. The gamble is tricky. > Now some of the winners of the collapse seemed to have had a firm grasp of the situation. But how would _you_, as an investor, know that? How do you measure that? Read all the data. Defaults of 4% are expected in the ideal market. Their bet only needed defaults to reach 5% to pay out. Those who started in the game carefully selected from the sub prime mortgages the ones most likely to default after 2 years: the interest only no documentation loans. The real question is why were they able to short the ones more likely to default for the same cost as the ones less likely to default. Those risks were all upfront. Note that the methods these people used is obvious even with foresight: read the data on the investments, it was all there. The only hard part was the data was 100 pages of fine print. This data was was there and honest, if I gave any investor this data and forced them to read it they would arrive at the same results. Again though, reading the data is a hard job and so most of those who should read it didn't, they just assumed everything was as it was before not noticing the the numbers of no documentation loans was going from few to a majority. If there was any luck involved it was only that the investors who made money had the idea to one day not read a stock 10-k report and instead read a bond report. There were signs that these guys saw that others didn't, but once they had the idea to look at the data it really is a no brainier. The only thing I didn't have is enough money to invest (minimum investment is $30 million and that was raised to $100 million quickly), the patience to wait 2 years for it to pay off, the luck to think of the bond market (if I was looking for a great stock in China at the time I might have found something good, but not this great investment in bonds), and the willingness to wade though all these finance documents looking for any that are worth investing on. The last is by far the most important: I find the data boring and so I don't want to analyze it. Note that the subprime bubble is over. You cannot pull that off today in subprime. Or at least I don't think you can: I haven't looked at the data. Every 10-20 years some opportunity comes up. 3/4ths the battle is the idea to look in the right place, the other 1/4th is to actually understand all the data. There might be something now, there might not. I don't have a crystal ball. Even if I did, I don't have enough money to ride out the market. As more than one person has said, "the market can remain irrational longer than you can remain solvent". Several of those who made a ton of money nearly went bankrupt holding onto their bets for just the 2 years they knew it would take for them to pay off - and they were right about the 2 year prediction!

by huherto 10y ago

lmm 10y ago

IIRC 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 ago
Shorting 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 ago
  The 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 ago
    That was part of the problem in delaying them from cashing out.
- sliverstorm 10y ago
  "take steps" kind of sugar coats it, from the film it sounds like the banks strongarmed the ratings companies to lie about the quality of the derivatives as the ARMs folded.
  - talmand 10y ago
    That was my impression from sources outside the film as well. Like it was stated in the film, "if we rate them lower they'll go down the street to our competitor".
- lmm 10y ago
  > Shorting is a risk. Shorting with big money is a big risk. Calling it "shorting" suggests the downside was unlimited (as it is when shorting equities). That wasn't the case for this trade.
- gozur88 10y ago
  It was not difficult to see the housing bubble would burst. The problem is you can't make money knowing that without getting the timing mostly right. That's the hard part.

bluGill 10y ago

Yes, but unlike a normal short their loss was limited. They had (IIRC) a 7 year contract to pay $25million/year unless things went bust in which case they get paid $1 billion. So their worse case was a $175 million loss, their best case was a billion gain. If you have the money the potential return on invest is great. I'm about half way through the book now, but I don't have it handy at the moment to look up the real numbers though.

wahern 10y ago
By that measure the returns on a lottery ticket is magnitudes better. The big question is the likelihood of the gamble paying off. For a lotto ticket that's easy to figure. Trying to time the collapse of a bubble? If that was easy bubbles wouldn't exist. Maybe it's implied that 7 years was clearly more than enough time, but that's only clear in hindsight. Now some of the winners of the collapse seemed to have had a firm grasp of the situation. But how would _you_, as an investor, know that? How do you measure that? Warren Buffett can write all the books in the world for as long as he likes, but successfully communicating his knowledge, his strategies, his intuition, has proven fairly difficult. It's probably not even possible because Warren Buffett probably doesn't 100% understand his strategy. Likewise for other consistently successful people. If they were capable of communicating it, there'd be many more people like them. It's like the old adage, if you code to the best of your ability, by definition you're not capable of debugging it.
- bluGill 10y ago
  > The big question is the likelihood of the gamble paying off. For a lotto ticket that's easy to figure. I agree. The gamble is tricky. > Now some of the winners of the collapse seemed to have had a firm grasp of the situation. But how would _you_, as an investor, know that? How do you measure that? Read all the data. Defaults of 4% are expected in the ideal market. Their bet only needed defaults to reach 5% to pay out. Those who started in the game carefully selected from the sub prime mortgages the ones most likely to default after 2 years: the interest only no documentation loans. The real question is why were they able to short the ones more likely to default for the same cost as the ones less likely to default. Those risks were all upfront. Note that the methods these people used is obvious even with foresight: read the data on the investments, it was all there. The only hard part was the data was 100 pages of fine print. This data was was there and honest, if I gave any investor this data and forced them to read it they would arrive at the same results. Again though, reading the data is a hard job and so most of those who should read it didn't, they just assumed everything was as it was before not noticing the the numbers of no documentation loans was going from few to a majority. If there was any luck involved it was only that the investors who made money had the idea to one day not read a stock 10-k report and instead read a bond report. There were signs that these guys saw that others didn't, but once they had the idea to look at the data it really is a no brainier. The only thing I didn't have is enough money to invest (minimum investment is $30 million and that was raised to $100 million quickly), the patience to wait 2 years for it to pay off, the luck to think of the bond market (if I was looking for a great stock in China at the time I might have found something good, but not this great investment in bonds), and the willingness to wade though all these finance documents looking for any that are worth investing on. The last is by far the most important: I find the data boring and so I don't want to analyze it. Note that the subprime bubble is over. You cannot pull that off today in subprime. Or at least I don't think you can: I haven't looked at the data. Every 10-20 years some opportunity comes up. 3/4ths the battle is the idea to look in the right place, the other 1/4th is to actually understand all the data. There might be something now, there might not. I don't have a crystal ball. Even if I did, I don't have enough money to ride out the market. As more than one person has said, "the market can remain irrational longer than you can remain solvent". Several of those who made a ton of money nearly went bankrupt holding onto their bets for just the 2 years they knew it would take for them to pay off - and they were right about the 2 year prediction!