2008 Housing Crisis Questions/Discussion
Seriously, does anyone else find it hard to believe that the big banks who facilitated selling Burry Credit Default Swaps allowed for such a massive position to be held against them. Was the effect of greed/the thought that “the housing market cannot crash” that strong to blind them from doing DD?
To anyone knowledgeable on the Burry CDS play situation, could you please answer the following questions.
Did the banks check to see why Burry wanted a massive position in Credit Default Swaps and if his theory had any legitimacy before selling Burry his massive positions in CDSs that would result in the banks having massive losses when they paid off?
Did the banks hedge their risk against their exposure to Burry’s (and other) CDS positions and if so, why didn’t their hedge position(s) work?
Surely if Burry, who to my knowledge, found out about the state of the housing market by himself, then the big banks, with their large workforce, could have found out also, especially since they, to my knowledge played a large part in making the housing crisis?
It just doesn’t make since how the banks would see an investor like Michael Burry, who, to my knowledge was, even before the CDS play, a respected investor/trader, essentially full porting into a position, and then react by seemingly just agreeing to taking the opposite side of the play with no second thoughts. MULTIPLE banks to my knowledge btw, not just one. Obviously speaking in hindsight, but still, even back then Burry’s CDS order request had its red flags to the banks right? Why did the banks take the risk of facilitating these massive CDS orders?
Credit for the in the title: The Big Short (Movie)
“There’s no fucking way that the big banks are that stupid”
byu/Super_Rush7926 inwallstreetbets
Posted by Super_Rush7926
39 Comments
If you’re that interested, just read the book, bro.
Institutions are dumping gold while we are facing inflation.
they were making bank on fees and thought they were selling insurance on something that would never happen. plus a lot of these banks were so compartmentalized that the guys selling CDSs weren’t talking to the guys packaging mortgages – classic case of the left hand not knowing what the right was doing
the real kicker is they probably saw burry as some weird hedge fund guy betting against the american dream and figured easy money, but they didn’t realize their own mortgage division was literally creating the ticking time bomb he was betting agianst
Never underestimate just how stupid people are.
Especially groups of people.
https://preview.redd.it/p558mznnj9rg1.png?width=898&format=png&auto=webp&s=3dc0e64776ff6b0b8cb443ad8e3df9cdff792c89
Post some positions or take it to a financial history sub
I don’t think it’s all that complicated? Banks are run by humans and humans have inherent biases. One of those is groupthink. It reminds me of Chernobyl (the HBO series). Once enough humans are convinced that something is a fact (such as a specific type of reactor not being able to melt down, or such as housing prices never going down) it becomes very difficult to take the contrarian stance. It’s also very difficult to convince people they’re wrong if they’re making gobs of cash being wrong.
It almost takes a professional contrarian to find these errors in groupthink. If you follow Burry’s substack, the man definitely is one of those who calls 20 of the last 2 recessions. I don’t think professional contrarians are any more likely to be right then a member of the groupthink, and I suspect if you follow Burry’s advice as financial advice you would lose money pretty quickly, but it’s useful for an opposing opinion at least.
I don’t think they give much fk. They’ll be bailed out if necessary.
Burry probably watched the movie ‘The Big Short’ and got the idea from that.
Think of it this way, credit default swap at that time is like buying asteroid damage insurance.
They were making a lot of money selling credit default swaps because the thinking was the housing market couldn’t go down. They also hedged their bets by purchasing their own credit default swaps from AIG. When it started to go south and they couldn’t package up the loans to sell as mortgage backed securities anymore they were left with a lot of mortgages on their book which people were defaulting on and they were on their hook for the loss. Then they tried to call in the AIG credit default swaps they purchased as they went up in value by a lot but AIG couldn’t pay out as they didn’t have the money and didn’t hedge themselves either and had to be rescued by the government with a bailout. Basically banks thought they hedged themselves by buying their own cds but the company they bought them from (AIG) went bankrupt and couldn’t pay out bringing down the financial system because of it.
https://preview.redd.it/bqbz95rxm9rg1.jpeg?width=1080&format=pjpg&auto=webp&s=59629b5e902dd4794322a1def259ab909e8cbcf5
Banks were making money hand over fist for several years leading up to it. There was little regulation and I think next to no regs on CDSs. Big companies were doing all sorts of financial fuckery with loans, securitization and derivatives.
Yes. Dumb ass Chad finance bros were only worried about making money and nobody was really watching the risk. Cue interest rates going up and shit loans and people started defaulting or walking away. Leverage is a mean bitch.
Boy, have you come to the right sub for sober, cogent analysis!
Some many good replies, but also, someone had the same idea as burry but in 2005 five, he had to close at his position at an loss.
TLDR: Yes. They really are that stupid
The people making the money didn’t care. So what if it blew up in 5-10 years if you can make a few million a year while the gravy train is running.
Not saying this is ethical or right but having worked in finance the last 15 years front and back office the take care of yourself and your family at the expense of greater good while not shared by everyone is still pretty strong.
Also again not always but often front office folks often don’t care what risk or back office says and just want to get whatever deal done.
Pretty sure the answer is cocaine
Bernanke and his army of PhD’s said everything was hunky dory. Piled high and deep.
Individual traders made commission on sales ro Burry. They made bank, who cares if it goes south later. That’s the banks problem, not theirs.
Before the crash. You could literally buy a house with 120% financing with sub credit on a brand new house. Builder’s were throwing up 120k houses that everyone could get a loan for. New house two new cars and then some got convinced that a balloon payment or adjustable apr was a great deal. Remember these people didn’t have much financial education. Your mortgage is 500$ now. When that balloon pops? Oh shit, 1500$. The banks figured out that this was going to be a shitshow. So they started packaging these loans in micro investments and selling them. You should watch the movie Too Big to Fail. I have a friend from high school that bought a 400k house way back in 2005. Never had a job period. Let’s just say that he has been in the natural pharmaceutical business for his entire life. He sent my parents a message saying that he was having a house warming party. I figured his parents died? Nope, he got a loan and bought a house. He hasn’t ever been on the books ever. Unless you were around to see the shitshow, maybe you should go back in time and educate yourself about just how f-ed up it was.
Also in the movie, when Burry goes to a bank to buy CDS (I think it was Goldman?): “This is Wall Street Dr. Burry, if you offer us free money, we’re going to take it”
holding CDS is expensive, and Burry was down, like DOWN DOWN
being right was only half the battle, timing was important and Burry’s investors were already trying to liquidate him
Settle down and take my order.
I think I hate what the Big Short has done to investing discussion.
The one time the bears were right, they made a movie on it.
They were like the regards here discovering CSP in a bull run ‘whoa infinite money glitch’
Imagine last summer after the pop to 560 selling MSFT 250DTE 480p for big ass premium convinced surely by then even with some vol it couldn’t be lower. And even if, impossible that the premium wouldn’t net you profit nonetheless. No way this behemoth drop below EMA200.
Being a bank, you can cook your books and pass that premium as cash so you leverage that position ten fold.
At that time, show me one analyst/quant/wsb crayon eater projecting a 30% price drop. Everyone was shilling this shit ”the FCF machine vertically integrating the AI revolution, the everlasting flywheel of everything computer blablabla”
Institutions and funds were still buying.
That’s it.
Yes, the Big Banks are that stupid. Because one of two things will happen: either a) they get bailed out, or b) they go bankrupt. In any case, Bank executives will make their money and bounce. I used to work in a bank. I know.
It’s not so much that they weren’t aware of the validity of his theory. The sad reality leans towards the fact that they did not care because they knew they could get away with it. The movie harps on this near the end. The corruption ran very deep, only one person ended up getting arrested. They made there money, passed the bag onto the American middle class.
The answer to your first question is , yes.
No individual or organization within a given bank had the whole picture or wanted to really know the truth, they were massively incentivized to keep the credit going, by the government by their bosses, by public pressures. Why go looking for a problem when everything appears like it’s going great even if it is too good to be true.
People lose money – not banks. Same now, banks are setting up so people can short Private Credit.
Greed but they did hedge with insurance. The problem was they all went bankrupt. The majority holder was AIG and we propped them up. It’s more complicated but tried to give an easy answer
He did feel -30% portfolio pressure from the market play
In the end it’s all or nothing
The problem comes at 3 level.
1. How performance and commission are measured for these bankers. They were not measured by how much loss they averted or how risk balanced is their portfolio. They were measured by how much money they brought in for the bank. Someone who is more risk adverse and not take those deals will be outshine by someone else who did. Those who did get better performance review, better recognition, better bonus, and more likely to be promoted. Other see that and copy their behavior.
2. Diffusion of responsibility/bystander effect. Everyone assume that if the problem is that bad, someone else will call out on it. BoA, JP Morgan, AIG, Lehman, WF, etc. all look at each other and assume its all fine cause everyone else is doing it. So everyone assume its fine.
3. No historical precedence. Risk and actuarial works off historical trend. However, prior to 2008, housing price trend rarely dropped vs prior year and there was no historical record of systemic default. Actuarial had no basis of comparison. Risk know that CDS can be tricky but the underlying asset is a house. They assume, at worst, that enough mortgage holder will sell their house and repay the mortgage before an actual default; avoiding the credit downgrade/credit event for the CDS. They didn’t imagine that the housing bubble will collapse so much that so many mortgage will be underwater; triggering the default and credit event for the CDS.
Take, for example, someone offer to pay you $1M per year for a $100M CDS on US T-bill. Sure, the treasury may have just announced the US may be insolvent, but do you believe US will default on T-bill? Likely not. Even if you do believe such a risk and say no, they will offer it to the person next to you then the person next to them. Eventually someone will say yes. That person got a 10% bonus on that and nothing happened for a year. Next year, someone offer $5M for $500M CDS on US T-bill. Someone else will take it. And it eventually snowballed.
https://www.reddit.com/r/explainlikeimfive/comments/175luhn/eli5_how_do_credit_default_swaps_work_and_how_did/
They thought they were “too big to fail” and selling him CDS was a no brainer free money from a dummy.
At least op is not a plagiarist
“Credit for the in the title: The Big Short (Movie)”
Honestly movies, media and blissful ignorance make people expect way too much from institutions and the people that run them. Decisions at all levels are made far more haphazardly than you would think, because they often hinge on the approval of a single person, and that single person can be anybody. Most people regardless of their profession just do what everyone else does.
For an experienced professional at the time they would’ve been buying/selling these CDS for years and be confident in their evaluation. They might have even made the same deal (maybe even multiple times) to other people who failed and just gave them their money.
Free commissions baby! Let accounting nerds figure that shit out. I get paid based on making the deal happen, why care what happens after that?
Bit of survivorship bias isn’t it? The banks that were prudent enough to not take on undue risk/sell credit default swaps just kept doing the same before and after the great financial crisis, so you don’t hear about them.
Also a small loss is your problem, but a giant loss is outsourced to the American taxpayer. So there’s an incentive for aggressive banks to play russian roulette with a thousand empty chambers per bullet, so to speak, for reliable income.