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- The Big Short: Inside the Doomsday Machine by Michael Lewis
- A Detailed Timeline of the 2008 Financial Crisis
- The Big Short (2015) – Full Cast & Crew – IMDb
- The Big Short (2015) – Synopsis
- The Big Short (film) – Wikipedia
- The Big Short – Wikipedia
- The Big Short (film) – Wikipedia
- The Big Short (2015) – Rotten Tomatoes
- ‘The Big Short’ movie review – Business Insider
- How Accurate Is ‘The Big Short’? The Financial Crisis Film Stays Close To The Truth
- In ‘The Big Short,’ Adam McKay Uses Absurdity as His Guide – The New York Times
- The True Story Behind The Big Short – Real Michael Burry
- Review: In ‘The Big Short,’ Economic Collapse for Fun and Profit – The New York Times
- The Big Short falls far short
- How historically accurate is The Big Short? | Film | The Guardian
- How Accurate is “The Big Short” Movie Economically? – Real Estate Decoded
- ‘The Big Short’ Explained | MONEY
- What to Know About the Housing Bubble Before You See The Big Short | TIME
- The Big Short Somehow Makes Subprime Mortgages Entertaining | WIRED
- Interview: Adam McKay And Michael Lewis On ‘The Big Short’ : NPR
- What ‘The Big Short’ Gets Right, and Wrong, About the Housing Bubble – The New York Times
- The Big Short (film) explained
- Is ‘The Big Short’ Based On A True Story? The Dramedy Takes On The 2008 Financial Crisis
- Subprime crisis impact timeline – Wikipedia
- Subprime timeline – Sep. 15, 2008
- Timeline of the United States housing bubble – Wikipedia
- Subprime Loan Crisis Explained By Cartoon Stick Figures — My Money Blog
- SubPrime Mortgage Mess Explained (with voice) – YouTube
- Subprime Crisis in a Nutshell – 2008, Financial Meltdown Explained – YouTube
- Subprime mortgage crisis – Wikipedia
- Turns Out the Housing Crisis Wasn’t All About Subprime – Bloomberg View
- The Financial Crisis for Dummies – CBS News
- How Wall Street Made The Mortgage Crisis Worse : Planet Money : NPR
- Financial crisis of 2007–2008 – Simple English Wikipedia, the free encyclopedia
- Crash course | The Economist
- Market Crashes: Housing Bubble and Credit Crisis (2007-2009) | Investopedia
- United States housing bubble – Wikipedia
- Salomon Brothers – Wikipedia
- Michael Lewis – Wikipedia
- Lewis Ranieri – Wikipedia
- Lippmann, Deutsche Trader, Steps Down – The New York Times
- Michael Burry – Wikipedia
- What Is Michael Burry Doing Today? ‘The Big Short’ Character Is Still Weary Of The Financial Market
- ‘Big Short’: 5 things to know about Christian Bale’s real-life character
- Steve Eisman – Wikipedia
- Subprime lending – Wikipedia
- Mortgage-backed security – Wikipedia
- ELI5: why are my mom’s mortgage backed securities worthless if only 20% of mortgages failed? : explainlikeimfive
- Collateralized debt obligation – Wikipedia
- Securitization – Wikipedia
- Collateralized mortgage obligation – Wikipedia
- Michael Lewis Introduces the Characters of ‘The Big Short’ – Medium
- Steve Carell hopes you want to throw up after seeing ‘The Big Short’ – The Washington Post
- The True Story Behind The Big Short – Real Michael Burry
- Michael Lewis on the Hedge Fund Manager Who Saw It Coming — The Motley Fool
- The SEC’s weird case against Wing Chau
- National Average Wage Index
- Amortization Schedule for a $300,000 mortgage for 30 years with a 4.25 Percent Interest Rate
- Synthetic CDOs Making Comeback as Yields Juiced – Bloomberg
- Goldman Sachs Hawks CDOs Tainted by Credit Crisis Under New Name – Bloomberg
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Note: This transcript is automatically generated. There will be mistakes, so please don’t use them for quotes. It is provided for reference use to find things better in the audio.
Maybe this is a spoiler to the rest of the episode, but The Big Short kicks off with something that is probably the biggest inaccuracy in the film. That’s when Ryan Gosling’s character, Jared Vennett, breaks the fourth wall by telling the camera that the world of banking is very boring.
I’m not referring to Jared’s claim that banking is boring—that’s true. What I’m referring to is Jared’s existence at all. You see, Jared Vennett is not a real person. The character of Jared in The Big Short is based on a real person by the name of Greg Lippmann.
Until he stepped down in 2010, Greg was the global head of asset-backed securities trading at Deutsche Bank.
And that segues into many of the other characters in the film. Almost all of them have had their names changed. Steve Carell’s character in the movie is Mark Baum. The character of Mark is based on a hedge fund manager named Steve Eisman. Or there’s Ben Rickert, who is played by Brad Pitt. His last name was changed in the movie. There is no Ben Rickert, but instead he’s based on Ben Hockett.
Of the main characters, the one who didn’t have his name changed was Christian Bale’s character: Michael Burry.
Anyway, back in the movie Ryan Gosling’s character, Jared, is explaining that Lewis Ranieri changed the game by creating mortgage-backed securities. In the movie, Lewis Ranieri is played by Rudy Eisenzopf.
Lewis is a real person, and the claims made in the movie are pretty accurate. In the 1970s, Lewis worked at Salomon Brothers, a Wall Street bank that was worth billions up until their acquisition by Travelers Group in 1998. It was in the 1970s when Lewis helped come up with securitization.
If you’re not familiar with that term, you’re not alone. It’s a term Lewis claimed to have coined himself. Basically, securitization is a method of taking a bunch of different types of debt, pulling them together and selling them off to a third-party investor.
Why would a third-party investor buy up a bunch of debt? It’s basically a way of moving money from one account to another, skimming off the top as you do.
When someone buys up a collection of debt, which the movie The Big Short correctly explains as a collateralized debt obligation, or CDO, those investors get repaid through both principal and interest cash flows that are collected on the debt.
Perhaps one of the simplest ways to understand this is to make up a sample scenario. Let’s say you wanted to borrow $10 from your friend. They’re willing to loan you the money, but they’re not sure you’re good for it. You agree to pay ten cents per day. That means you’d pay him back the full $10 in 100 days.
Can you repay that amount in 100 days? To help convince them you can repay the money, you offer up your prized baseball card collection as collateral.
So the deal is you’ll take your friend’s $10 right now. You’ll pay ten cents per day for 100 days. If you don’t fulfill that agreement, at the end of 100 days he gets your prized baseball card collection. It’s got to be worth at least $10, right?
Your friend agrees and lends you $10.
In the financial world, that example would be referred to as an asset-backed security. Your baseball card collection is being used to help back a loan. Ideally, you pay everything off and you get to keep your collection.
Your friend might be rooting for you, but in most cases the banks aren’t your friend. They’d be hoping you don’t fulfill your obligation so they can take your prized baseball card collection. That way they can turn around and sell it.
So not only do they get to press charges against you for original $10 they let you borrow, but they get extra money for whatever they make off selling your prized baseball card collection. Ten bucks plus a prized baseball card collection? No wonder the banks make…well, bank.
The idea Lewis Ranieri helped bring about was to use home mortgages instead of assets. Instead of using your prized baseball card collection, why not use your home mortgage? After all, there’s no way you’d ever stop paying on your home. So as you keep paying your premiums on your home, you get to keep your home and your assets—your baseball card collection.
Everyone wins, right? Well, maybe for a little while at least.
Back in the film, after Ryan Gosling’s introduction of Jared Vennett, we get to meet some of the other stars in the film.
Christian Bale kicks it off by introducing us to Michael Burry. As we learned earlier, Michael is a real person. And the real Michael Burry is very similar to the way Christian Bale portrays him on screen.
Although as an actor, Christian Bale had to force one of his eyes to be lazy on screen to look like a glass eye, he did this because, in real life, Michael Burry does have a glass eye.
In the movie, Christian Bale’s version of Michael does a voiceover while the film shows shots of children playing football. He explains he’s always been more comfortable alone, and he believes it’s because of his glass eye, which he lost in a childhood illness.
This is true, although the movie doesn’t really go into much more depth. In truth, the real Michael Burry had to have his left eye removed because of a rare form of cancer. This happened before he was even two years old.
But that’s not the only reason Michael was more comfortable alone. When Michael had children of his own, a doctor diagnosed his child with Asperger’s Syndrome. That’s when, as an adult, Michael started to believe he himself also has the disorder.
Oh, and in the movie, Christian Bale’s version of Michael Burry is sometimes referred to as Dr. Burry.
This, too, is true. Michael Burry studied neurology at Stanford, but his heart wasn’t in it. He had a lot more fun with an investing blog he started while he was at school. So, eventually, he decided to quit medicine, shut down his blog and go full-time into being a money manager. But he still maintained his title, and often went by Dr. Michael Burry.
After this, the movie introduces us to Mark Baum, who’s played by Steve Carell. In the movie, Mark comes across as a rather brash person. He takes over a counseling session and starts talking about his problems. He complains to his wife, who’s played by Marisa Tomei, and she seems to be rather familiar with Mark’s rants.
We already learned Mark Baum isn’t a real person, but Steve Carell’s portrayal of Mark Baum was based on a very real person named Steve Eisman. And the way Steve Carell played Mark Baum is very close to the real Steve Eisman.
That’s a tongue twister, huh?
In fact, according to an interview with Steve Carell after the film was released, he explained that the real Steve Eisman was on set, helping guide the portrayal of Mark Baum’s character. In one scene, Steve would say he’d be much happier, or another scene he’d explain he was more brooding.
So while many of the conversations themselves were altered for the film, the overall character of Mark Baum is a pretty accurate portrayal of Steve Eisman.
After being introduced to Mark Baum, the movie cuts back to Christian Bale’s version of Michael Burry, who discovers a lot of the housing market is backed by subprime loans.
Then the movie does something it does periodically throughout, it uses a well-known person to help explain something very boring about the housing industry. In this case, it’s Margot Robbie in a bubble bath and drinking champagne as she explains the term subprime means “shit”. After this explanation, we see Michael Burry go around to a bunch of banks and start buying up bonds.
Of course, the explanation didn’t happen in history, but the movie doesn’t really try to pretend like it does. However, the explanation is pretty spot on, as is the portrayal of Michael Burry going to buy bonds from the banks.
A subprime mortgage is basically a housing loan made to someone who has less than perfect credit. Someone who the banks think might have a tough time paying it back. This is usually based on an event in someone’s life, maybe it’s unemployment, a divorce, a medical emergency that keeps them from working. Any number of things could trigger this, but basically if the banks don’t think you can pay back the loan consistently—month to month, without missing payments, you could get lumped into a subprime mortgage.
But they’re still mortgages. If there’s one thing people will pay first, it’s for the roof over their heads, right? While the banks might’ve thought they weren’t ideal people to loan to, even subprime mortgages were still mortgages.
What Michael Burry did was he convinced the banks to sell him credit default swaps against the subprime mortgages he had identified as being the most likely to be the first to default. Basically, the ones he thought people wouldn’t be able to pay back.
So what is a credit default swap? Well, in the movie, it’s Anthony Bourdain who comes in this time to explain. In the example, Anthony Bourdain explains the banks take a bunch of bad bonds and put them into a collateralized debt obligation, or CDO.
Being a world-famous chef, he then compares it to a restaurant making a seafood stew out of old fish. Instead of throwing away the fish they bought, take the leftovers and put it into a stew. All of a sudden, you have something new—not old fish.
This explanation, too, is pretty accurate, even if it is extremely simplified. While I’m no Anthony Bourdain, let’s try to go a little deeper in and explain what some of the other terminology is we hear in the movie.
So originally, a CDO was a collection of asset-backed securities. Remember the loan you made to your friend earlier in the episode when you put up your prized baseball card collection as collateral? Let’s continue that example, and say some nine other people did the same deal.
So now there’s a total of ten people, each have a $10 loan. Collectively, these can all be put together into a CDO. So instead of individual $10 loans, there’s one obligation of debt in the amount of $100.
On the banker’s side, they take a look at the people involved in the CDO and split up the loan into multiple pieces. These are something we hear about in the movie, they’re called tranches. Think of tranches like pieces of the pie.
Now for the sake of this example, let’s say there are two bankers willing to split the cost of the CDO. One of them wants to buy 80% of the CDO, so they pay $80. The other pays $20 for the rest of it. That money is divided up, and you and everyone else who applied for the loan gets their $10.
But it’s not free money. You have to pay it back, and with interest of course. And with any sort of loan, there’s always an element of risk. Just how much risk depends on a couple of factors.
The first is who you’re loaning to. Sure, you’re good for the $10, but is everyone else good for it? Maybe. Maybe not. That’s why banks look at past life events such as marriage, divorce, medical emergencies as well as how well you’ve been able to pay off debts before. All of this is rolled into your credit score, which basically tells the bank how much of a risk you are.
Another factor for the banks to keep in mind is their side of it. If one of the bankers spends $80 for a majority of the CDO, should they take the same amount of risk as the banker who spent $20? No, of course not.
So for that reason, CDOs are rated based on how safe they are. When the bank issues a CDO, they rate the tranches by things like AAA, AA, A, BBB. Since tranches are slices of the overall CDO, basically what the bank is doing is saying if you pay more you’ll get a safer bet.
The banker who paid $80 might’ve bought a AAA tranche while the other only spent $20 and got a BBB tranche. In this scenario, the banker who bought the AAA tranche would get their money back first. So as you pay back your loan, the AAA tranches get paid off first and eventually it starts to trickle down to the BBB tranches.
What happens if not everyone in the CDO pays off their bill? Well, that’s why BBB tranches are more of a risk. Hopefully that helps explain CDOs and tranches a bit more.
Don’t worry, it’ll get even more complex here in a bit.
Back in the movie, we finally get introduced to two more investors, Charlie Geller, who’s played by John Magaro, and Jamie Shipley, played by Finn Wittrock. They’re waiting for someone in the lobby of JP Morgan Chase, but they get turned down. That’s when they find a pitch from Ryan Gosling’s character, Jared Vennett, just lying on the table. Then Finn Wittrock’s version of Jamie Shipley breaks the fourth wall by telling the camera this isn’t entirely accurate to what really happened.
Well, that’s true. By that, I mean the discovery of the pitch wasn’t accurate. But the movie acknowledges this and then plainly states what actually happened, so there’s really not a lot more to say there.
After this, though, we get introduced to Ben Rickert. He’s played by Brad Pitt. Again, Ben’s name was changed for the movie. The real person’s name is Ben Hockett. But as far as we can tell, Brad Pitt did a pretty good job of depicting the real person fairly well.
The reason I say as far as we can tell is because, well, the real Ben Hockett has chosen to live a secluded life, which is the sense we get of the character in the film. Ben made his money by working for the Deutsche Bank in Tokyo for almost a decade.
According to one of the few interviews he’s done, Ben explained that after he got married and had his son, he decided he wanted to get out. He didn’t like who he was becoming, and didn’t want his son to see him that way. So he told his bosses he was going to quit. Their response gives you an idea of how good Ben was at his job. Rather than accepting his resignation, they asked him to explain the things he didn’t like.
He said he didn’t like going to the office, he didn’t like wearing suits and he didn’t like living in the big city. Pretty much everything.
So they told him he could wear whatever he wanted and live wherever he wanted as long as he didn’t quit. So he stayed on. For a time. And that’s where the other two young investors come in.
As you can probably guess by now, the two young investors that Brad Pitt’s character helps aren’t called by their real names in the movie either. In the film they’re Charlie Geller and Jamie Shipley. In real life, Charlie Geller’s real name is Charles Ledley. And Jamie’s real name is James Mai.
The movie explains the two started working out of Jamie’s garage with $110,000 dollars that Jamie earned by taking sailboats up and down the East Coast of the United States. That’s partially true, but it’s not really the full story.
In truth, James Mai started the company called Cornwall Capital as a means to diversify his father’s money. He did this with his father’s help. So you’re probably wondering who his father was?
Vincent Mai was the CEO and chairman of AEA Investors, one of the oldest private equity firms in the United States. He was also the chairman of the board at Sesame Workshop, the producers of Sesame Street. Oh, and he also serves on the board for the Juilliard School as well as having served as a trustee for the Carnegie Corporation of New York.
Needless to say, he’s well off.
James took $110,000 dollars and started the hedge fund in his garage along with Charles Ledley. So that’s fairly accurate to what we see in the movie. However, the movie makes it seem like the two are lost without Brad Pitt’s character, Ben Rickert. In truth, they received a lot of help from James’ father, Vincent Mai, who knew a thing or two about investments.
Still, Ben Hockett did join Cornwall Capital in 2005, about three years after it was founded. As of this writing, he’s still a part of the company.
Back in the movie, two groups of the film’s main characters head to Las Vegas for a conference. It’s here that Steve Carell’s version of Mark Baum starts to realize there is a housing bubble. This realization hits as he’s sitting across from a businessman named Mr. Chau. In the movie, Mr. Chau is played by Byron Mann.
Here is where we get another explanation of a banking term, this time from Richard Thaler and Selena Gomez as they explain synthetic CDOs. And again, their explanation is pretty spot on.
If you remember from our little example of a $10 loan and nine other people getting the same loan as it’s rolled into a single CDO. A synthetic CDO would be if someone else rolled a number of CDOs into yet another CDO, a synthetic CDO. It’s like CDO-ception, except this really happened.
And they’re purposefully complex. Bankers don’t really want you and I to know what’s going on, but in essence, synthetic CDOs are like building a house of cards. It’s buying slices, or tranches, of debt rolled into another debt. In this case all of this debt was propped up by the housing industry, so it was a pretty stable when compared to other forms of debt.
But it’s still bound to fail. No matter how well you balance your house of cards, it’s only a matter of time before it falls.
As Steve Carell’s Mark Baum sits across from Byron Mann’s version of Mr. Chau, it starts to settle in. Oh, and I should mention there really is a Mr. Chau. His name is Wing Chau, and he worked as a CDO manager for Merrill Lynch. Or, well, for the investors, but really for Merrill Lynch. That whole “working for the investors” thing was pretty accurate.
After Michael Lewis wrote his book, The Big Short, the real Wing Chau sued Michael Lewis for defamation. He claimed being portrayed as the biggest villain in the book hurt his ability to get a job. Mr. Chau didn’t win that lawsuit.
There’s a great article that covers the case by Felix Salmon over on Reuters, I’ll make sure to put a link to it in the show notes. As Felix explains in the article, a more likely scenario for Mr. Chau’s inability to find work is that after the housing collapse, no one needs a CDO manager anymore.
Back in the movie, the few who saw the housing bubble start buying up swaps. Their plan is to short them in the hopes to profit during a collapse.
That’s true, and although the movie is pretty accurate in its depicting of the overarching events, if you’re like me you can find The Big Short still leaving you wondering how people can make a ton of money when the housing market collapses.
There is a very brief moment where it’s explained, but it’s easy to miss. Basically, banks started to hand out mortgages to anyone and everyone. Think of it like the worst edition of Oprah ever, “And you get a mortgage! And you get a mortgage!”
For most people in the United States in the mid-2000s, it was great. Banks would be willing to give you a home loan without a lot of pressure. In fact, in many instances they’d try to get you to buy an even nicer home. That’s great! You get a nice house and the banks make money each month when you make your payments.
On the back end, the banks would take your mortgage and throw it in with a bunch of other mortgages to turn it into a CDO. So Wall Street investors would buy and sell these CDOs to make plenty of money of their own. They, in turn, would pressure the banks to lend even more. More loans mean more CDOs, and more money to make.
Everyone wins, right?
That only works for as long as the housing values keep going up and people can make their payments. Unfortunately, the banks didn’t really try too hard to check to see if the people they were loaning money to had a realistic chance of paying it back.
It wasn’t something that happened overnight, but the demand for houses meant more houses were being built. Slowly, the supply for the houses started to tip beyond the demand and the housing prices started to go down. At the same time, people who couldn’t ever afford the payments they were offered started to lapse on their payments.
According to the Social Security Administration, the average person’s income was $40,405.48 in 2007, or about $3,367 per month before taxes. In 2007, the cost of the average home sold was nearing $300,000 or a monthly mortgage of about $1,400.
Of course those are just averages and I didn’t factor in things like taxes, food costs and other bills that are needed to live. You can see, though, how quickly the housing costs were reaching a point where it’d be really tough to make the payments—even if you wanted to.
In 2008, just like the movie shows, everything came crashing down. With housing supply starting to outpace demand, the housing prices started to fall and people who were already struggling to pay for their homes started to fall further behind. This caused a chain reaction that caused the worst recession in the United States since The Great Depression started on October 29th, 1929.
Most of the world didn’t believe it could happen. Housing would never crash. What makes people like Michael Burry and the others in The Big Short special was they saw through the numbers and saw the crash as being inevitable.
So they went out and bought what amounted to insurance on the housing market. No one else believed it could happen, so all of the banks were completely happy selling insurance on something that’d never happen. All it meant for them was as long as the housing market stayed afloat, Michael Burry, Greg Lippmann, Steve Eisman and the rest had to pay monthly premiums on their insurance.
Think of it like buying insurance on a car. Except this isn’t just any car. It’s a special car that everyone in the world thinks is going to be kept in a show room. There’s no way anything will happen to it.
But you’re the only person who knows it’s true purpose will be as a demolition car. It’s only a matter of time before the car will get totaled and you’ll be able to claim the insurance money when that happens. Would you do it?
The big difference here being something Brad Pitt’s character shares with Jamie and Charlie in Vegas. When the housing market crashes, that means people will be hurt. Millions of people will lose their jobs. They’ll be homeless, and many will even die as a result.
Would you still do it?
The investors in The Big Short did. Although it’s worth pointing out that the movie correctly shows them not really liking it. The real Steve Eisman, who was the basis for the character Mark Baum, didn’t like that he was correct. Just like Steve Carell’s portrayal of disgust at the corruption of the system, Steve Eisman hated it.
But he still made millions from it.
With so much money being thrown around and so many lives being affected, there was way too much going on to talk about here. I’d really recommend picking up Michael Lewis’ book, The Big Short, to get a much more in-depth understanding of what happened.
Although there was a lot of events that led up to it, on February 7th, 2007 the housing market began its downward crash when the bank HSBC announced it’d see larger losses than they had originally anticipated due to the rising number of defaults from subprime mortgages—people who couldn’t pay their mortgages.
A couple months later, on April 2nd, New Century Financial, which was one of the largest subprime mortgage lenders in the United States, announced it cut 3,200 jobs and filed for bankruptcy.
In June, another bank, Bear Stearns, announced they were forced to dump assets due to a large holding of subprime mortgages that were reporting large losses. This was another chain reaction, because other banks such as Merrill Lynch, JP Morgan Chase, Citigroup and Goldman Sachs had all lent Bear Stearns money.
On September 18th, 2007, the Federal Reserve started cutting interest rates at seven straight meetings. Their reasoning for this cut was to help the credit crunch, but at the same time they also agreed to start lending money directly to Wall Street firms. Before this, the Federal Reserve only loaned money to banks.
Since the failing firms on Wall Street didn’t have assets to use as collateral, the Federal Reserve, which is the backbone of the economy in the United States, agreed to take the mortgage-backed securities as collateral.
Then as 2008 rolled around, things only got worse.
On March 16th, 2008, the Federal Reserve decided to step in and help Bear Stearns, which was on the verge of bankruptcy. The Federal Reserve essentially forced JP Morgan Chase to buy out Bear Stearns and assume $29 billion dollars in losses. Oh, and the Federal Reserve gave JP Morgan Chase about $25 billion dollars to help with that.
Then, on July 11th, 2008, the U.S. government took over one of the leading banks who had lent money to people without proof of their income. This was the FDIC, or the Federal Deposit Insurance Corporation, taking over a Californian bank called IndyMac. To date, this was the most expensive bank failure in history. However, the FDIC issued an announcement that this wasn’t to be the last.
And they were right.
Probably the most notable of the other banks hit by the crisis were Fannie Mae and Freddie Mac. Fannie Mae is the pronunciation of an acronym, FNMA, which stands for the Federal National Mortgage Association. It’s a publicly traded company that was established by the U.S. government during the Great Depression in 1938.
Freddie Mac is the term given to Fannie Mae’s brother organization. Freddie Mac is the Federal Home Loan Mortgage Corporation or FHLMC. Freddie Mac was also created by the government, although not until 1970.
Together, those two companies were the backers of over $5 trillion dollars in mortgages. But with the housing crisis and so many unable to pay their mortgages, their losses were staggering.
The U.S. government stepped in here, too.
On September 6th, 2008, the United States Treasury Department announced they were taking over both Fannie Mae and Freddie Mac. That means the government absorbed over $5 trillion in debt. At the same time, the Treasury Department also announced they’d loan $200 billion dollars to other banks who are crucial home lenders.
Nine days later, one of the country’s largest banks, Bank of America, agreed to buy out one of the country’s largest mortgage brokers, Merrill Lynch. That deal cost $50 billion. Around the same time, another massive Wall Street firm, Lehman Brothers, filed for bankruptcy.
According to the FDIC, the largest banks closed in 2008 were Washington Mutual, with about $307 billion in assets, IndyMac at $32 billion, Downey Savings and Loan at $12.8 billion, Franklin Bank, SSB with $5.1 billion and First National Bank of Nevada at $3.4 billion.
Those may have been some of the big banks who failed, merged or were simply taken over, but they were hardly the only ones affected.
Merrill Lynch announced it lost $5.5 billion. Then a couple days later it revised that to $8.4 billion. NetBank went bankrupt. A Swiss bank, UBS, announced almost $700 million in losses. Over 400 people were arrested for mortgage fraud by the FBI between March 1st and June 18th, 2009.
At the end of the movie, there’s some text on the screen that gives us a summary of events. According to the film, $5 trillion in pensions, real estate, 401ks, savings and bonds simply disappeared. As a result of this 8 million people lost their jobs and 6 million lost their homes in the United States alone.
Unfortunately, these numbers are pretty accurate. Over 8 million people lost their jobs between 2007 and 2009 in the United States, in no small part to the between 6 and 7 million who lost their homes.
On Christmas eve in 2009, the U.S. Treasury Department made a historic announcement that most people probably didn’t even pay attention to.
They announced they would be providing unlimited financial support to Fannie Mae and Freddie Mac. Those two companies had losses in excess of $400 billion. And yet the government, who took over both Fannie Mae and Freddie Mac, was unwilling to let them fail.
As a side note here, this sort of bubble wasn’t the first to burst. At the turn of the century, there was the dot-com bubble that saw an onslaught of tech companies grow and then crash. Many companies simply folded. Some, like Amazon.com, saw their stock price drop from $700 per share to $7 per share in the collapse.
Between 1999 and 2001 as the dot-com bubble burst, about $6.2 trillion in wealth simply disappeared. So why wasn’t there such a massive economic collapse then?
Perhaps the answer was found by the Professor of Economics and Public Affairs at Princeton University Atif Mian, which he explains in his book called House of Debt. Basically, the dot-com companies were held up by a bunch of rich investors. So when the companies failed, they lost a ton of money but they could afford to do that.
In contrast, the people who lost during the housing collapse were anything but the super-rich. They were normal people like you and I. So when they started to fall behind on bills, eventually losing their home and jobs, their spending stopped. That devastated the economy.
The real Michael Burry ended up making exactly what the movie says he did. When Christian Bale walks out of Scion Capital at the end of the movie, he writes up 489% on the whiteboard.
Although Michael has since said he didn’t go out looking to short the housing market, because he happened to notice it he couldn’t turn it down. After founding his company, Scion Capital, on November 1st, 2000, by the time June of 2008 hit, Michael ended up recording returns of 489.34% of the net fees and expenses. As a quick comparison, the S&P 500 reported a return of about 3% in that same timeframe.
Michael’s investors earned $700 million in profit while Michael himself made about $100 million for his efforts.
Many of the others depicted in the movie weren’t quite as forthcoming with how much they made out of the deal, but it’s safe to say they were all profitable.
As we learned, the character of Jared Vennett as played by Ryan Gosling was based on a man named Greg Lippmann. During the crash, Greg worked at Deutsche Bank. While we don’t really know exactly how much Greg himself made, according to an investigation from the Senate Committee who was tasked with digging into the housing collapse, Deutsche Bank had built up a $5 billion short against the subprime market.
And the Committee found a bunch of emails from Greg that led them to believe he was behind it. So while we don’t know exactly how much Greg profited from shorting the market, Greg left Deutsche Bank soon after and started his own hedge fund in 2010 called Libre Max Capital.
In the movie, Mark Baum is married to a woman named Cynthia, who’s played by Marisa Tomei. We already learned the character of Mark Baum is based on Steve Eisman. Steve’s wife’s name is Valerie, so her name was changed for the film as well.
Steve Eisman also ended up profiting from the collapse. Although, like the movie shows, he wasn’t too happy with it. Oh I’m sure he was happy with the money, but not in the corrupt system that caused the collapse. In 2010, Steve took a position against corruption when he launched a campaign against for-profit colleges.
In one of his speeches, he said after the housing collapse he never thought he’d be involved in an industry as socially destructive and morally corrupt as the subprime mortgage industry. Then he went on to explain how the for-profit education industry is exactly the same.
Others have criticized Steve for this, claiming the regulations he supported would profit him since he had short positions against private colleges.
As for Charlie and Jamie in the movie, they’re still around, too. Although the company they founded was called Brownfield in the movie, that’s not true.
Charles Ledley and James Mai founded Cornwall Capital and made approximately $120 million by the time the market crashed. In 2009, Charles left Cornwall and started his own hedge fund in Boston.
As of this writing, both James Mai and Ben Hockett are working together at Cornwall Capital.
The final text on the screen in the movie says that in 2015, several large banks started selling billions of something called a bespoke tranche opportunity. According to the movie, this is just another name for a CDO.
This is true, although the movie makes it seem like CDOs disappeared. Sadly, they haven’t.
After the collapse in 2008, sales of CDOs understandably slowed. About 90% of the investors who bought into CDOs before the collapse reported losses. But they didn’t go away.
In 2012, Citigroup sold about $2 billion in synthetic CDOs, and nearly $1 billion in the first three months of 2013 alone.
A 2015 article from Bloomberg News states that Goldman Sachs has joined with other banks to start selling something they’re calling a bespoke tranche opportunity. Despite the name change, these are CDOs that are sliced up into different levels of risk and sold to investors at hedge funds.
If that sounds familiar, it should. How long do you think the house of cards will survive this time?
In January of 2011, the United States Financial Crisis Inquiry Commission reported its findings on the housing crash. Here is a quote from its findings:
The crisis was avoidable and was caused by: Widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages; Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels.