The Big Short And Twilight Of The Elites

The mortgage crisis of 2007 marked catastrophe for millions of homeowners who suffered from foreclosure and short sales. Most of the problems involving the foreclosing of families’ homes could boil down to risky borrowing and lending. Lenders were pushed to ensure families would be eligible for a loan, when in previous years the same families would have been deemed too high-risk to obtain any kind of loan. With the increase in high-risk families obtaining loans, there was a huge increase in home buyers and subsequently a rapid increase in home prices. As a result, prices peaked and then began falling just as fast as they rose. Soon after families began to default on their mortgages forcing them either into foreclosure or short sales. Who was to blame for the risky lending and borrowing that caused the mortgage meltdown? Many might blame the company Fannie Mae and Freddie Mac, but in reality the entire system of buying and selling and free market failed home owners and the housing economy.

In the movie the big short, Lewis Ranieri, who is a banker of the Wall Street, created an idea that companies packed thousands of mortgage all bundled together to sell, which is the AAA credit-rating bond, and can obtain high yields with low risk because everyone should pay for their mortgage. The concept of Lewis Ranieri is called mortgage-backed securities (MBS). However, the demand of buying MBS is more than MBS supply. Therefore, when the risk of MBS is high, Collateralized Debt Obligation (CDO) is a way to change subprime loans to high- rating bonds and it can be sold again. Although CDO is full of subprime loans, it still can get AAA rating because

In the 1980s, investments banks such as Goldman Sachs, Merrill Lynch, Bear Stearns, JP Morgan, and Morgan Stanley started selling mortgage bonds. Mortgage bonds were a collection of thousands of home mortgages, purchased from lenders, and their associated income streams (monthly payment). To address the fact that some homeowners often refinance their debt when interest rates are low which prematurely pays off the debt, mortgage bonds were stacked into layers called ‘tranches’. The lowest tranche represented mortgages to be paid off early, and the highest layer was the last mortgages to be paid off.

In October 1981, Congress passed a tax break that allows thrifts to sell their money-losing mortgage loans and reinvest the proceeds for higher returns. Mortgages were pooled by dollar amount and interest rate and then traded. Salomon Brother’s wanted to make mortgages look like bonds. Ranieri had the loans transferred into bonds by getting a stamp of the U.S. government agency Ginnie Mae, Frannie Mae, or Freddie Mac. The stamp was proof of the U.S. government guarantee that made trading mortgage bonds possible. Ranieri’s mortgage department made 215 million over 3 years. After 6 years, Ranieri’s mortgage department was making more money than any other Salomon businesses combined. They formed this group of traders, all characterized as Italian, loud, and fat.

In the lead up to the current recession, when the real estate market began to fall, there were so many investors shorting stocks and securitized mortgage packages that were already falling, that the market simply fell further. There were no buyers at the bottom, and the professional investors made millions off of the losses of others. Beyond this, there was no real federal regulation for securitized mortgages, since there was no real way to gauge the mathematical risk of any given package. This allowed the investors to take advantage of the system and to short loans on real people’s homes. Once these securities were worthless, many of the homebuyer’s defaulted on their mortgages and were left penniless. No matter from which angle this crisis is looked at, the blame rests squarely with the managers who began the entire cycle, the ones who pursued the securitization of mortgages. Their incompetence not only led to the losses of Americans who have never invested in the stock market, but to losses for their shareholders.

The final segment in Business in the movie series focused on documentaries about modern capitalism. The two documentaries we watched were "Too Big to Fail" and "Inside Job." Both documentaries focused on the big Wall Street bailout situation and how it was eventually resolved. Both spoke about the people involved, how they were connected and who was really to blame for the problem. Though they both explored the big bailout and the recession to follow, each movie had their own opinion on who was really involved and who was to blame for the big market crash.

The Meltdown is a PBS special on the events of the financial crisis of 2008, in a timeline format, revealing the thinking behind decisions made during the fateful months before the stock market crash in August of that year. Some financial gurus on Wall Street devised a plan to bundle several mortgages together into a group, and then selling that bundle to another group of investors looking to invest in securities. The lender did not need to earn money from the loans he was giving out, he merely gained enough of a profit from the bundling operation that billions were being made on Wall Street from 2005-2008. The problem is that these bundles were risky, and as credit unworthy individuals defaulted on their mortgages, the entire system crumbled into what is now known as the Stock Market Crash of 2008, and have subsequently lived during the Great Recession.

The Big Short is a movie that discusses the housing market crash in 2008. As you may know, the banks, the mortgage brokers, and the consumers were all affected by this collapse. On each level of the system, there were things that went wrong and that could have been changed that could have prevented the failure of the housing market.

The film the Big Short, directed by Adam McKay is about the financial/housing crisis of 2008. The film explains how the history of the housing market, how the crisis began, and introduced all of the people and companies involved. The most important aspect of the movie was that the crisis was foreseen, but nothing was done to prevent it. The three main characters are Michael Burry, Jared Vennett, and Mark Baum. Burry was the first to recognize the faulty practices of the housing market, and bet against the market. His actions caught the attention of Vennett and Baum, which led them to investigate the housing market, and bet against it as well.

The housing market crash, which broke out in the United States in 2007, was caused by high risk subprime mortgages. The subprime mortgage crisis resulted in a sudden reduction in money and credit availability from banks and other lending institutions, which was referred to as a “credit crunch.” The “credit crunch” and its effect spread across the United States and further on to other countries across the world. The “credit crunch” caused a collapse in the housing markets, stock markets and major financial institutions across the globe.

Steve Carell’s character, Mark Baum, played a key role in this situation. Baum’s team consisted of young, sarcastic, initially skeptical analysts who decided to conduct their own real estate market research. They are the few who worried about the extent of damage this financial collapse would have on the common American. They decided find the truth, and ultimately they realized that, whatever happened, they would not lose since taxpayers would have to pay the bill. They were right. All those bankers who took risky bets on products that they did not even understand completely ended up hurting so many people. Actually in this financial collapse there was no deliberate deception, banks were as ignorant and negligent to all the effects of these

On March 10, 2010, Michael Lewis published The Big Short, a book divulging into how a small group of investors predicted financial crisis in 2008 and benefited off of what many people over looked. Lewis explained that these investors realized that the banks were giving out crazy mortgage rates and loans which people wouldn't be able to pay back. After this epiphany, they came to the conclusion that it would only be a matter of time before the poorer people getting worse deals would default, causing a chain reaction and subsequently bringing down the entire American housing market and economy. In order to make money they purchased CDSs - credit default swaps - as a way to bet against the housing market and after a lot of patience, received a hefty return on what many thought was a crazy investment.

The banks then created a new idea—linking investors to homeowners through mortgages. Ordinarily, a mortgage broker would connect a house-buying family to a mortgage lender, who would then supply them with a mortgage. In this system, everyone is happy—the mortgage broker earns a handsome commission, the mortgage lender earns a new mortgage, and the family is now a homeowner in a market of increasing housing prices.

One of the first indications of the late 2000 financial crisis that led to downward spiral known as the “Recession” was the subprime mortgages; known as the “mortgage mess”. A few years earlier the substantial boom of the housing market led to the uprising of mortgage loans. Because interest rates were low, investors took advantage of the low rates to buy homes that they could in return ‘flip’ (reselling) and homeowners bought homes that they typically wouldn’t have been able to afford. High interest rates usually keep people from borrowing money because it limits the amount available to use for an investment. But the creation of the subprime mortgage

Another key event described in “The Big Short,” was when American International Group found a way to insure subprime mortgage loans while being able to bury these risks on its balance sheet. This was made possible by the fact that AIG was a triple-A-rated corporation with an enormous