THE BIG SHORT MOVIE ANALYSIS 1

The Big Short Movie Analysis

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Synopsis

The Big Short (2015) is a short film that deals with the mortgage crisis that led to the

2008/2009 financial crisis. The movie is based on the group of outsiders who forecasted the

collapse of the mortgage bonds by the banks. Michael Burry, as an investment supervisor at

Scion Capital, predicted that the U.S mortgage market was driven by a ticking time bubble

that was inflated by high hazard credit. Mr. Burry come up with an investment strategy that

will enable him to incorporate a credit default swap showcase that will allow him to profit

from the lodging market.

At that period, the mortgage boom spread like fire; the banks through wall street

come up with various financial assets that were sold to other investors who offered a higher

return. The banks assumed homeowners would continue paying for their monthly mortgages,

which reduced the risk of the financial assets.

Everything went well as planned; the housing prices went up, and the homeowners

continued to make their monthly installments on time. To please Wallstreet, the banks

become reckless that they did not mind who they lend the money; they did not bother to

check whether the customer was in a position to repay the mortgage in the future. As

predicted by Michael Burry, the prices of the houses went up, and homeowners were unable

to make their monthly installments.

Scion Capital predicted the impending situation, capitalized on it by insuring against

the possibility of a financial crisis. Mr. Burry bet against the housing market that was likely

to collapse since most of the mortgages were overrated by bond agencies where banks

collected all non-performing bonds to a subprime mortgage in AAA packages. According to

Vennett Hawks, a low-level representative at Deutsche Bank, the correlation between the

highest-rated AAA bonds and the lowest B- bond that were bundled together in subprime
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CDO was wrong (Gardner & Adam McKay, 2015). In the end, the market collapsed, and the

odds were in favor of the outsider who predicted the bust of the bubble. The 2008 financial

crisis, which was a result of a bubble of the mortgages, is a well-documented event in history

and economic books.

Mistakes by Loser of the Battle

The Big Short 2015, is a good representation of how corrupt executives lead the

financial institutions. Most people assume that the financial institution, especially the banks

are supposed to be the solution to the economic problems; however, in the Big Short (2015),

they were the intermediaries to the financial crisis that robbed many people their homes,

business, and jobs. The financial institutions failed in many ways and contributed a lot to the

bust of the mortgage bubble.

The first mistake the banks was financial innovation through subprime mortgages.

According to Margot Robbie, one of the characters, “anytime you hear about the ‘Subprime.’

Think ‘shit.’ (Gardner & Adam McKay, 2015) The 2008 financial crisis was engineered by

the financial institution that gave out mortgages without taking into account the ability of the

customers to pay. As a result, the mortgage bubble had been created, and an increase in

default level and foreclosure of subprime mortgages spilled out to other financial assets that

led to a full bubble burst.

The second mistake by the financial institution that led to the 2008 financial crisis is

the creation of credit default swaps and CDOs. The banks pooled mortgages and sold them to

investors in the form of bonds. As the homeowners continue to pay the monthly installment,

the cash flow is sent to the bondholder in terms of interest. In the film, the pooled mortgages

were dividends into a sophisticated financial instrument by the name Collateralized Debt

Obligation (CDO) unlike the Mortgage-Backed Security (MBS) the CDO comprised different
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tier that ranged from high to low risk. According to Vennett Hawks, the banks got the

correlation of the bond wrongly since it increased the adjustable rate of mortgages, which

caused the homeowners to default on their mortgages and cash flow to CDOs Dried Up

(Gardner & Adam McKay, 2015). As the cash flow from the mortgages dried up, the CDOs

managers were unable to pay the bondholder and the credit default swap.

The third mistake by the banks that led to a bust of the bubbles is the assumption that

the housing market was to remain relatively stable indefinitely. The assumption led the banks

to come up with all manners of securities to reap high returns. The mortgages due to their low

risk of default characteristic were rate AAA the highest rating of any financial instruments.

Vennet discovered that bond agencies overrated most mortgages with the banks assembling

the subprime in the AAA portfolio.

Ideas that Won the Battle

After the outsider discovered that the mortgage bubble was about to bust, they bet

their money on by insuring against the collision of the housing market. The group led by

Michael Burry, Jarred Vennett, Mark Baum paid monthly premiums to benefit from the

financial crisis. In the end, the group got their profit when the market collapsed. Michael

Burry created a credit swap that would allow him to short the housing market (Evans. 2019).

Michael Burry knew that his client would not welcome his idea, and they were likely to ask

for a refund. Everything went as planned, but Micheal Burry placed a cessation on

withdraws.

On the other hand, Jarred Vennett learned the Michael Burry plot to profit from

economic collapse, he called Mark Baum, and the two approached Jimmie Shipley to form

Cornwall Capital. Micheal Burry had discovered that Mortgage-Backed Securities (MBS)

were comprised of very risky subprime adjustable-rate loans, and the rates were likely to
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skyrocket in 2007, where the demand for the mortgages will begin to decrease exponentially

until the MBS are worthless. As projected, the adjustable mortgage rate increased to an

unsustainable level, and the homeowners were unable to pay for monthly installments, the

dried cash flows led the CDOs to be worthless.

The Future of Banking Industry after the 2008 Financial Crisis

The global financial has a substantial effect on the banking sector in the United States

and other parts of the world. Banks and other financial institution were blamed for the crisis

since they triggered the housing bubble that led to a decline in economic activity. The

financial panic of 2008 and the banking crisis created a perfect ground for new financial

regulations. Two years after the financial crisis, the United States Senate enacted two primary

legislation; the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The Dodd-Frank legislation was named after Sen Christopher J. Dodd and Rep.

Barney Frank who led the enactment of the Act in both the senate and congress. The Act was

meant to keep an eye on Wall Street, especially the banking sector. For instance, the Act

proposed the formation of the Financial Stability Oversight Council (FSOC) that is

responsible for monitoring the activities of the banks. If any bank becomes too big, the FSOC

is supposed to recommend the Federal Reserve to increase its regulation to prevent any

bankruptcy (Fein, 2010). The federal reserve can increase the reserve requirement that

ensures the banks has enough liquidity to maneuver through economic challenges.

On the other hand, the consumer protection act stopped the banks from benefiting

from the depositor money. The Act prohibited banks and other financial institution from

using or owning hedge funds for their own benefits. The Act only allows the banks and other

financial institution to set up a hedge fund only at the request of the customer (Fein, 2010).

Before the financial crisis, the banks were free to form any type of hedge funds which in most
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cases was not beneficial to the customer. In big short, the banks were free to create

Collateralized Debt Obligation (CDO) that had a huge return to them at the expense of the

customer's interest. The banks can no longer create a financial instrument that has direct

profit to them without the consent of the customer.

Reference

Armon, E. (2016). The Big Short. http://digitalcommons.calpoly.edu/cgi/viewcontent.cgi?

article=1225&context=comssp

Evans, K. L. (2019). The Big Short.

http://www.academia.edu/download/51236386/Philosophy_of_Documentary_Film_K

LEvans.pdf

Gardner, D., & Kleiner J. (Producers), & Adam McKay A., Milchan A., & Brad Pitt B.

(Directors). (2015). The Big Short “Jenga.” Paramount Pictures.