Hi all, here's a new thread from kaw's favourite budding Historian/Economist. I'm here today to talk about the new Hollywood Movie "The Big Short" and with help from articles, I hope to explain the movie to people with less knowledge about the economy. I get it, to the untrained eye, the 2 hour plus epic is just a group of mashed up clever words which most people won't understand... but that's the whole point. The film explains why the housing market in the US crashed, even though everyone from the white house down thought it was the safest market out there... yeah "Merica" The new movie The Big Short takes a subject that is ordinarily as far from exciting as you might think possible—true-life mortgages and bonds—and turns it into what TIME’s critic Stephanie Zacharek calls “a crackerjack entertainment…with a conscience.” Then again, it shouldn’t be so surprising, given how crazy the mortgages in question actually were. In 2007, TIME broke down the financial systems that set the movie’s plot in motion. First came “subprime and exotic mortgages that did away with many of the safeguards built into the classic 30-year fixed rate with a 20% down payment.” These special mortgages were meant for just a small slice of home buyers, but they became widely popular during the real-estate bubble. “The demand was coming not so much from borrowers as from Wall Street, which packaged the loans into securities to sell to investors looking to pile into ‘low risk’ real estate,”. “So mortgage brokers found ways to squeeze buyers into first and second mortgages even when their finances were questionable. Consider this, a buyer with no income, no job and no assets could buy a mortgage.” Okay now what does that all mean? Bank's brought up a new idea to make money - wow big shocker, these mortgages where mortgages that weren't of the best quality but designed for low income households(so they were cheap) this meant the big bucks wall street investors corrupted the idea and bought shed loads of the package mortgages, which meant the banks had to group the mortgage packages together even more making mortgage rating which would be rated CCC(not very safe - investors stay away) get rated AAA(easy money - please invest) and here sows the thread which led to the complete collapse of the market. Blame it on one of Wall Street's recent innovations, the collateralized debt obligation, or CDO. The recipe: buy home loans, blend them, then slice up the result into different securities (reflecting different levels of risk) to sell to investors. Many such securities carry AAA or “investment grade” ratings despite subprime mortgages being in the mix. From there, things get really complex—CDOs created from other CDOs, synthetic CDOs crafted from credit-default swaps, none of which had experienced a down market. “The problem is that CDOs were untested. There was not much history to suggest CDOs would behave the same way as AAA corporate bonds,” says Richard Bookstaber, a hedge-fund manager and author of A Demon of Our Own Design, who views market palpitations as a predictable by-product of complex financial products like CDOs…" But what's a CDO??? CDOs are effectively a type of bond, which is backed by loans, other bonds or assets. Banks used CDOs to reduce the amount of debt on their balance sheet. One way to think of them is like this: A bank may have some mortgage loans which are worth $10,000. This bank may then sell a CDO to another bank. What this means is that the second bank has a bond backed by the mortgage loan. Therefore, as the mortgage is paid back, the second bank will get interest payments. However, if people default on their mortgages, then the person owning the CDO is going to see a decline in the value of the CDO. The first bank has in effect sold on its mortgage loans to another company. Therefore, if the person with a mortgage defaults, the risk is born by the person who bought the CDO. CDO’s meant when mortgage defaults rose, many banks around the world went bankrupt. Part of the problem is that people buying CDOs were not aware of the risk involved. CDOs can also involve other types of assets – not just loans. CDO's where basically the reason for the crash - thank you a ton banks! The film explains the origination and complexity of a “synthetic CDO” in a scene where actress Selena Gomez plays blackjack. Joined by economist Richard Thaler, they explain how increasingly larger side bets on Gomez’s hand of blackjack are great when she is winning – a metaphor for a rising housing market. However when Gomez loses the hand – or the housing market falls – those increasingly larger side bets set off a domino effect that create larger losses at the table and the economy, respectively. So now you under stand the "Big" bit, the housing market if you where still unsure, but what is the "Short" bit? Right now imagine you're betting on a horse, but instead of betting on it to win, you're betting that it will lose. Yeah that's a short. The Big Short follows the uncanny people who noticed the flaw and did the unthinkable. They betted against the Housing Market. Hope Y'all enjoyed, I know it might be a tough read but its incredibly interesting. Okay guys Peace out. What's your thoughts? ~Huxley P.S "TLR" not welcome on this thread - have a nice day EDOT: "£" changed to "$" as it's the currency used by the organisations involved