A man named Michael Burry is the manager of a hedge fund and discovers, after reading through an extensive list mortgages, that the United States’ housing market is extremely unstable. Quite certain of his findings, he predicts that the housing market would crash in the second quarter of 2007. This, having piqued his interest, led him to visit multiple banks, asking each whether he’d be able to invest in a credit default swap market. This would allow him to bet against market-based house mortgages. The banks, perceiving a far different future for the housing market, readily accepted Burry’s offers. In all, Burry spent 1.3 billion dollars betting against the mortgages. This also meant that he had to pay hefty premiums to the banks he’d made deals with. Many of his clients were upset by this, considering it a ‘rash action’ on his part, and asked for him to sell them all back immediately. Fortunately, Burry ignored these commands, and continued following his instinct.
Jared Vennett, a salesman at Deutsche Bank, becomes interested in Burry’s tactic after hearing from another bank who had sold Burry a credit swap. Vennett is drawn to this idea, and decides to invest some of his own money in these swaps. While contacting banks, Vennett mistakenly calls Mark Baum, the FrontPoint hedge fund manager. Baum, who already has a bad taste for big banks, decides to invest in swaps as well.
Charlie Geller and Jamie Shipley had started a small firm out of their garage, and become interested in the idea of buying credit swaps (the idea is introduced to them by Vennett). They started out with about 100,000 dollars, but are now handling millions through their strategy of buying cheap insurances with big potential payouts. The strategy had done them well thus far, and the buying of credit swaps seemed a very favourable idea to them. Unfortunately, their earnings fell short of the minimum required for an ISDA (International Swaps and Derivatives Organisation) certificate. This would’ve allowed them to make swaps like Baum’s and Burry’s, however, since they couldn’t attain this certification, they were forced to resort to another method. They had met an older man named Ben Rickert, who is a retired securities trader. Although he is a bit reluctant, Charlie and Jamie are able to convince him to help them. When they attend the American Securitisation Forum, they end up making better deals by betting on mortgage securities with higher ratings. The banks they encounter eagerly accept their offers, as they see the mortgage securities to be extremely stable. However, they begin suspecting that banks are committing fraud, as the Securities and Exchange Commission has no method of regulating mortgage-backed security activity.
Despite their seemingly victorious night, Rickert is disappointed and disgusted in the two young men. He points out that while they become filthy rich, they’ll be ruining the lives of countless other people. Unemployment rates would skyrocket, and an economic crash would also lead to deaths. They then realise that the banks intended on maintaining the value of their swaps and then short them before the now inevitable economic crash. In desperation, the two once again call upon Ben, who is on vacation in England. While sitting in a pub, Ben is able to sell most of their swaps, and in the end, they make a total profit of 80 million dollars.
In the end, Burry earns a total of 2.69 billion dollars. His fund’s value had increased by 489% after the house market had crashed. Baum and his team profited by 1 billion dollars, with a complete loss of faith in the banking system.
It was interesting to see how Burry was able to see through everyone’s certainty in the housing market. It was also interesting to hear the story behind these people’s reasoning and why they did the things they did. This movie was very informative and captivating and told the story of the housing market crash in 2007 in a very succinct and understandable manner.
The Big Short is available for checkout from the Mission Viejo Library.