Money Game and Your Life
DEBT. Why do you write B in DEBT? Why don’t you read it? Because B exists, but wants to hide. B is for the B-rated bonds or securities. Watch The Big Short, an American film released in December 2015. Director Adam McKay & his team say the drama is “based on a true story.” So this is a page of the American history or the world history. Economic bubbles repeat to appear in the human history since the 1637 Dutch tulip bulb mania. This is one of them.
Lewis Ranieri invented a new banking system in the late 1970s, & then the US banks started to securitize home loans to sell to pension funds, insurance companies, other banks, hedge funds, & so on. After the banks filled the prime rate customers with mortgage loans, they began to lend money to the subprime rate customers. The loans were packaged into MBSs & sold to investors. The more the banks lent money, the more they issued the securities. An MBS was considered no risk, because the banks thought that most of the borrowers would never default at the same time. Dr. Michael J. Burry, featured in The Big Short, cool, genuine one-eyed manager of the hedge fund Scion Capital, was one of the skeptical figures on this banking system. He analysed detail conditions of each & every home loan. The results made him decide to short the housing market, even though Federal Reserve Chairman Alan Greenspan stated that it was not the bubble & these securities were rated at AAA by the 2 major rating agencies, & moreover, there were no ways to hedge the “rock solid” securities. He needed to invent the CDS, Credit Default Swap. that the holder would gain profit if the prices of the securities went down, instead, the seller would gain the premium if the prices went up. The bankers sneered at him requiring high premiums. The deals were smoothly done one after another. Paying the premiums, Scion Capital waited for the market to recognize the subprime loan risk with patience.
Deutsche Bank salesman Jared Vennett, in The Big Short, overhears a rumor about Mike in a bar. FrontPoint manager Mark Baum & his team, caught by Jared’s wrong number call, examine the actual circumstances & find out a dog’s name loan, a street of houses for sale, a loan broker that provides the ninja loan to anyone, especially to immigrants, who are not familiar with the English language, & a happygolucky stripper who owns 5 houses & a condo. Mark comes to the conclusion that the housing market is the bubble.
This is one more impressive scene in this film. When Charlie & Jamie, young challengers, dance happily with their promising CDS positions, Ben Rickert, a mentor of the 2 guys, reproves: “if we are right, people lose houses, people lose jobs, people lose retirement pays, people lose pensions . You know what I hate about fucking banking? It reduces people to numbers. Here's a number - every 1% unemployment goes up, 40,000 people die, did you know that? Stop fucking dance!”
The 2008 financial crisis proved that a few were right & many were not far serious with the financial market.
This movie begins with Mark Twain’s quote:
It ain’t what you don’t know that gets you into trouble,
It’s what you know for sure that ain’t so.
PS: You can learn the financial terms such as LTV, CDO, ninja loan, etc. in The Big Short. For Example, the CDO is a topic in a talk of the business meeting between Mark & Jared.
Mark “A CDO is dog shit wrapped in cat shit?”
Jared “That’s right.”
