THE BIG SHORT

CAST
• Directed by Adam mckay
• Screenplay by Charles Randolph
• Based on “The Big Short” by Michael Lewis
• Starring Christian Bale
Brad Pitt
Carell
Rayan Gosling
• Production Company Regency Enterprises
Plan B Entertainment
• Distributed by Paramount Pictures
• Budget $50 million
• Box office $133.4 million

Publisher W.W. Norton & Company
Author Michael Lewis
Publication date March 15, 2010
The Big Short describes several of the main players in the creation of the credit default swap market that
sought to bet against the collateralized debt obligation (CDO) bubble and thus ended up profiting from the
financial crisis of 2007–08. The book also highlights the type of person who bets against the market or goes
against the grain.

Trailer

Summary
In 2005, eccentric hedge fund manager Michael Burry (Christian Bale) discovers that the United
States housing market is extremely unstable, being based on high-risk subprime loans.
Anticipating that the market will collapse in
2007, as interest rates would rise from
adjustable-rate mortgages, he envisions an
opportunity to profit.

• His plan is to create a credit default swap market, allowing him to bet against market-based
mortgage-backed securities .
• He proposes his idea to several major investment and commercial banks who readily accept.
Burry's huge long-term bet, exceeding $1 billion, entails paying substantial monthly premiums to
the banks.

• This requirement sparks his clients' vocal unhappiness, believing he is "wasting" capital, but Burry
refuses.
• He later discovers that the banks collude with a major bond-rating company to maintain ratings
on worthless bonds, allowing them to sell off their losing positions before the true values became
known.
• Under pressure, Burry restricts withdrawals from his fund, angering his investors.

• Eventually the housing market collapses and his fund's value
increases by 489% with an overall profit of over $2.69 billion.

Terminologies
• Treasury bonds
• Utility Stocks
• MBS (Mortgage backed securities)
• Mortgage bonds
• Adjustable Rate Mortgages
• Subprime loans
• Credit default swaps
• Tranches
• CDO (Collateralized Debt obligation)
• Housing Bubble
• IPO
• Hedge Funding
• FICO Scores
• ISDA Agreement
• Coupon Payments

• Treasury bond (T-Bond)
• marketable,
• fixed-interest U.S. government debt security
with a maturity of more than 10 years.
• T - bonds make interest payments semi-annually
• primarily risk-free.
• they are issued by the U.S. government
• very little risk of default.

Different Credits
AAA
AA
A
BBB
BB
B
Most senior
Least senior
• A tranche is a common financial structure for debt
securities such as mortgage-backed securities.
• These are made up of multiple mortgage pools
that have a variety of mortgages, from safe loans
with lower interest rates to risky loans with higher
rates.
• Each mortgage pool has its own time to maturity,
with its own risk factors and reward benefits.
• Therefore, tranches are made to divide up the
different mortgage profiles into slices that have
financial terms suitable for specific investors.
• If an investor wants to invest in an MBO, he can
choose the tranche type most applicable to his
risk aversion and desired return.

• A Mortgage-backed security (MBS) is a type of asset-backed security
• It is secured by a mortgage or collection of mortgages.
• This security must also be grouped in one of the top two ratings as determined by an accredited
credit rating agency
• Usually pays periodic payments that are similar to coupon payments.
• When an investor invests in a MBS, he is essentially lending money to a home buyer or business.
• An MBS is a way for a smaller regional bank to lend mortgages to its customers without having to
worry about whether the customers have the assets to cover the loan.
• Instead, the bank acts as a middleman between the home buyer and the investment market
participants.

• A subprime loan is a loan offered to people who
do not qualify for a conventional loan, either
because of low income, a high loan-to-value
ratio, or poor credit history.
• Borrowers considered risky to lenders can
receive financing for a home mortgage through a
subprime loan, but the loan generally carries a
higher interest rate.
• Their Fico score will be less than 600.

Subprime lending
Banks
Subprime Lenders
Prime loans
Low interest
Subprime Borrowers
People With Bad Credit
rating/unstable income
Take high interest loans to
buy home
Subprime loan
High interest
wants to make more
money

• A collateralized debt obligation (CDO) is a type of structured (ABS).
• Originally developed for the corporate debt markets, over time CDOs evolved to encompass
the mortgage and mortgage-backed security (MBS) markets.
• Like other private label securities backed by assets, a CDO can be thought of as a promise to
pay investors in a prescribed sequence, based on the cash flow the CDO collects from the pool
of bonds or other assets it owns.
• The CDO is "sliced" into "tranches", which catch the cash flow of interest and principal
payments in sequence based on seniority.
• Consequently, coupon payments vary by tranche with the safest/most senior tranches
receiving the lowest rates and the lowest tranches receiving the highest rates to compensate
for higher default risk.

Mortgages
House loans
Repackages and sells them to
investors as CDOs
Hedge funds
&
Other investors
Lends
Sells
Collateralized debt obligations - CDO