Bonds, Bubbles, Bust, & Michael Burry in “The Big Short”

Back in January, I introduced what is to become a monthly series which would feature contents surrounding cinema. The first of which was “Ray Harryhausen: Monsters, Myths & Lore.” February came, languished for 29 days this time around, but I didn’t manage to share a follow-up.

On this note, we’ll begin March with one of my favorite movies, The Big Short, based on the true story surrounding the housing market crash from the viewpoints of Mark Baum, Charlie Geller, Jamie Shipley, and Michael Burry (then head of Scion Capital).

The movie starts with a favorite quote of mine, which is attributed to Mark Twain:

It ain’t what you don’t know that gets you in trouble. It’s what you know for sure just ain’t so.

Based on the true story of events leading up to the 2008 market crash, we’re first presented with Lewis Ranierie and how he “changed the banking industry” with the introduction of  mortgage-backed securities (MBS), under the impression that they were a safe investment with high yield because, “who doesn’t pay their mortgage?”  “Who, who,” said the owl.

Proudly, he thinks this is a AAA rated bond. Signed. Sealed. Delivered. Bankers were enjoying their lush paychecks, and at least in the movie, scantily clad ladies.

In comes Michael Burry, who smells that something’s afoot in 2005, and begins to look at the state of the mortgages contained in the 20 top selling mortgage bonds.  With his findings, he decides to approach several banks and short them to the sum of $1.3 billion through the purchase of credit default swaps.

Next we’re introduced to Mark Baum, whose firm FrontPoint Partners gets a tip-off from a wrong number. They meet with Jared Venett (nicknamed Chicken Little & Bubble Boy) who proceeds to tell them that the worst mortgage bonds are then repackaged as a collatorized debt obligations (CDO) and rated AAA by the rating agencies.  Fast forward and FrontPoint shorts to the amount of $50 million in Garibaldi IV, BBB swaps. Then another $500 million following a meeting with a CDO manager at the American Securitization Forum in Vegas, who Mark Baum tells “I didn’t realize there was anything to manage with CDOs.” Here we learn that not only are there CDOs, but synthetic ones as well. The plot thickens without flour or cornstarch.

We meet Charlie Geller and Jamie Shipley of Brownfield Fund in the lobby of JPMorgan Chase for a 4:50PM meeting (bank closes at 5PM), seeking an ISDA agreement not knowing that the capital requirement was $1.5 billion. At the time, their fund was worth a respectable $30 million having started with $110,000. They later find out about the housing bubble prediction through a friend of Charlie Geller’s and with funding from Ben Rickert, a suspicious retired banker who felt the NSA had too much authority, also bet against the housing market.

Then 2008 happened and “boom” goes the dynamite. Except that it wasn’t funny considering the impact.

One of the most humanizing parts in the movie was when Charlie Geller and Jamie Shipley were celebrating shorting some AA tranches of CDOs, and Ben Rickert (Brad Pitt) said: “Do you gave any idea what you just did? You just bet against the American economy. Which means, if we’re right, people lose homes. People lose jobs. People lose retirement savings. People lose pensions. […] Every 1% unemployment goes up, 40,000 people die.”

The movie ends with Michael Burry sending an e-mail to investors as he prepares to close down the hedge fund:

[…] People want an authority to tell them how to value things, but they choose this authority not based on facts or results. They choose it because it seems authoritative and familiar… and I am not, and never have been familiar. So I’ve come to the sullen realization that I must close down the fund.

Michael J. Burry, M.D.

It’s said that the investing Michael Burry continues to do is focused on water. Water which should be a basic human right… so is clean air, but you can actually purchase cans of it.

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