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  2. CAST • Directed by Adam mckay • Screenplay by Charles Randolph • Based on “The Big Short” by Michael Lewis • Starring Christian Bale Brad Pitt Carell Rayan Gosling • Production Company Regency Enterprises Plan B Entertainment • Distributed by Paramount Pictures • Budget $50 million • Box office $133.4 million
  3. Publisher W.W. Norton & Company Author Michael Lewis Publication date March 15, 2010 The Big Short describes several of the main players in the creation of the credit default swap market that sought to bet against the collateralized debt obligation (CDO) bubble and thus ended up profiting from the financial crisis of 2007–08. The book also highlights the type of person who bets against the market or goes against the grain.
  4. Trailer
  5. Summary In 2005, eccentric hedge fund manager Michael Burry (Christian Bale) discovers that the United States housing market is extremely unstable, being based on high-risk subprime loans. Anticipating that the market will collapse in 2007, as interest rates would rise from adjustable-rate mortgages, he envisions an opportunity to profit.
  6. • His plan is to create a credit default swap market, allowing him to bet against market-based mortgage-backed securities . • He proposes his idea to several major investment and commercial banks who readily accept. Burry's huge long-term bet, exceeding $1 billion, entails paying substantial monthly premiums to the banks.
  7. • This requirement sparks his clients' vocal unhappiness, believing he is "wasting" capital, but Burry refuses. • He later discovers that the banks collude with a major bond-rating company to maintain ratings on worthless bonds, allowing them to sell off their losing positions before the true values became known. • Under pressure, Burry restricts withdrawals from his fund, angering his investors.
  8. • Eventually the housing market collapses and his fund's value increases by 489% with an overall profit of over $2.69 billion.
  9. Terminologies • Treasury bonds • Utility Stocks • MBS (Mortgage backed securities) • Mortgage bonds • Adjustable Rate Mortgages • Subprime loans • Credit default swaps • Tranches • CDO (Collateralized Debt obligation) • Housing Bubble • IPO • Hedge Funding • FICO Scores • ISDA Agreement • Coupon Payments
  10. • Treasury bond (T-Bond) • marketable, • fixed-interest U.S. government debt security with a maturity of more than 10 years. • T - bonds make interest payments semi-annually • primarily risk-free. • they are issued by the U.S. government • very little risk of default.
  11. Different Credits AAA AA A BBB BB B Most senior Least senior • A tranche is a common financial structure for debt securities such as mortgage-backed securities. • These are made up of multiple mortgage pools that have a variety of mortgages, from safe loans with lower interest rates to risky loans with higher rates. • Each mortgage pool has its own time to maturity, with its own risk factors and reward benefits. • Therefore, tranches are made to divide up the different mortgage profiles into slices that have financial terms suitable for specific investors. • If an investor wants to invest in an MBO, he can choose the tranche type most applicable to his risk aversion and desired return.
  12. • A Mortgage-backed security (MBS) is a type of asset-backed security • It is secured by a mortgage or collection of mortgages. • This security must also be grouped in one of the top two ratings as determined by an accredited credit rating agency • Usually pays periodic payments that are similar to coupon payments. • When an investor invests in a MBS, he is essentially lending money to a home buyer or business. • An MBS is a way for a smaller regional bank to lend mortgages to its customers without having to worry about whether the customers have the assets to cover the loan. • Instead, the bank acts as a middleman between the home buyer and the investment market participants.
  13. • A subprime loan is a loan offered to people who do not qualify for a conventional loan, either because of low income, a high loan-to-value ratio, or poor credit history. • Borrowers considered risky to lenders can receive financing for a home mortgage through a subprime loan, but the loan generally carries a higher interest rate. • Their Fico score will be less than 600.
  14. Subprime lending Banks Subprime Lenders Prime loans Low interest Subprime Borrowers People With Bad Credit rating/unstable income Take high interest loans to buy home Subprime loan High interest wants to make more money
  15. • A collateralized debt obligation (CDO) is a type of structured (ABS). • Originally developed for the corporate debt markets, over time CDOs evolved to encompass the mortgage and mortgage-backed security (MBS) markets. • Like other private label securities backed by assets, a CDO can be thought of as a promise to pay investors in a prescribed sequence, based on the cash flow the CDO collects from the pool of bonds or other assets it owns. • The CDO is "sliced" into "tranches", which catch the cash flow of interest and principal payments in sequence based on seniority. • Consequently, coupon payments vary by tranche with the safest/most senior tranches receiving the lowest rates and the lowest tranches receiving the highest rates to compensate for higher default risk.
  16. Mortgages House loans Repackages and sells them to investors as CDOs Hedge funds & Other investors Lends Sells Collateralized debt obligations - CDO