For a $50 bet, they probably only have to deposit $5 with the dealer. What’s perhaps even crazier is that, in the real world, all those people betting on Selena’s Blackjack hand don’t need to poney-up very much of their bet. And derivatives still exist on virtually everything, not just mortgage-backed securities. That’s how derivatives work: they derive their value from some reference investment (in this case, Selena’s Blackjack hand). When she lost her $50, everybody else lost their bets – so the total impact of Selena’s $50 loss was more like $100,000. One of the best explanations in the movie was Selena Gomez showing how the whole casino was betting on her Blackjack hand. Your pension fund, if you have one, probably owns some. And still work today: $1.7 trillion was issued in 2015 in the US alone. Without “subprime borrowers” and layers upon layers of complicated financial products on top (see below), these things actually worked. Statistically, only a small percentage of homeowners would default on their mortgage – and any losses that occurred would be more than made up for by the interest paid by other homeowners who had taken out mortgages. those seeking an income producing asset – one that paid interest) a new alternative. Investors could buy, essentially, shares in that large mortgage and they would be entitled to their share of the interest payments.īack then, hardly any investor could buy mortgages and the innovation gave bond investors (e.g. In the 1970s he took thousands of individual mortgages and combined them into one large mortgage. The insurance is the CDS, the house is a CDO, the insurer is the bank, the fire is a credit event which triggers the payout, you are Michael Burry/Mark Baum.The Big Short opens with a brief introduction of Lewis Ranieri – the man who “invented mortgage bonds”. Then they say, "oh yeah, it's burning down." Dunno what you're talking about."Įventually the insurance company is able to sell the house AND get another insurance company to re-insure it. Eventually you can see smoke coming out of the house, maybe even some flames but the insurance company says "nope, no fire. So you buy the insurance, and you hope like hell it burns down. The property market is great, buying this house will be a great investment PLUS they can collect insurance premiums from you every month. The insurance company thinks you're an idiot by the way. Flammable stuff everywhere, poor construction, it's all just waiting to blow up. So you do, because despite the nice exterior you've seen the inside and it looks like shit. Suppose you are allowed to buy insurance on your neighbours house and if it burns down, you get paid out on the insurance money. They couldn't offload the billions of dollars in CDOs they had, fast enough. Mortgage defaults in the second quarter of 2007 exploded. By the time the big banks realized the CDOs were time bombs, it was too late. This allowed the big banks to sell their dog shit CDO's with a AAA credit rating when in reality they were worthless. Basically the big banks told the credit rating agencies to play ball or they would get another agency to do their dirty work. Then, the big banks started to buy CDS's on those CDO's they just sold.Īll of this was possible because the banks were in bed with the credit ratings agencies. So the banks decided to go to other banks that didn't quite understand what was going on, and sell their dog shit CDO's to them. They wanted to gets these time bombs off of their books so they didn't suffer nearly as bad of a loss when the bonds actually went down. They realized they were holding time bombs of bad assets. The big banks realized that the CDOs were worthless once mortgage defaults started to really skyrocket.
0 Comments
Leave a Reply. |
Details
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |