The Big Short is a very good film. I think even a normal non-money expert type should enjoy it and, importantly, get an insight into the crazy world of money. It also explains a lot about the silly seeds that were planted and grew into the Global Financial Crisis.
To really appreciate the film, I guess it would be good if you don’t go in short on some basic facts. I’ll try to give you a crash course for normal people on what the film is about, without ruining the ending.
In financial markets, when someone shorts something, he/she is a seller of an asset the majority wants to buy. In our Saturday Switzer Super Report, we actually list the companies that are being shorted by so-called smarties in the stock market.
They take a position and if they’re right with their bet, for example, a company’s share price falls from current levels, they can make a lot of money. When someone uses a broker to short sell, the broker lends them the shares at a certain price and the value of these shares are credited to the short sellers’ account. Let’s say there are 100,000 shares at $10 a pop (or $1 million). At a future time, 100,000 shares must be returned to the broker and if the price falls to $7, it’s very cheap for the short seller to return the shares to the broker and that’s the profit on the short selling. In this case, it would be $3 times 100,000. That’s a cool $300,000!
The film looks at some really smart people who started to look at the US mortgage market, which had exploded under low interest rates, and some silly government policies that were putting the wrong people into their own homes. It was also at a time when deregulation meant dumb loans were being made.
Now once upon a time, debt ratings agencies used to rate loan-related products for their safety and they were thought to be reliable raters. However, arguably, the agencies were being pressured to come up with safe ratings on big parcels of loans by the financial institutions who paid them to rate the loans. These loans were then bought by other financial institutions, whose key people thought they were buying a safe parcel of loans but a house of cards was building.
These products were called collaterized debt obligations but I won’t stress you out by explaining them. Just take it from me they were the cards in the house of cards that collapsed to create the GFC.
History had told too many people that home loans were safe so the mortgage market could not implode. However the guys in The Big Short realised that if people started to default on their loans, a hell of lot of financial institutions would be in trouble.
So the film is about shorting the US mortgage market! Until Michael Burry, an ex-neurologist and founder of Scion Capital, tried to do it, there was no financial product available to do it. When he put the idea to well-known financial institutions, they thought it was money for jam.
To know what happens next, you’ll have to see the movie. Don’t miss it, if you care about money and being wealthier when you retire. There are some important lessons in this film that everyone can benefit from. It also shows you that there are some people in the finance sector you always have to be worried about!