The Big Short (2015) - Dr Michael Burry analyzes Subprime MBSs (Feat. Margot Robbie) [HD 1080p]

Summary

In this transcript, Michael presents a daring plan to short the housing market, despite skepticism from his colleagues. He argues that the housing market is built on risky, subprime adjustable-rate mortgages, which will fail when rates rise in 2007. As the banks face a shortage of good mortgages, they start packaging increasingly dangerous loans into mortgage-backed securities. Michael proposes to bet against these bonds, despite the complexity of the financial instruments involved. His bold move to exploit the collapse of the market hints at the looming financial crisis.

Takeaways

• 😀 The speaker argues that the housing market is not as stable as it seems, predicting a crash due to risky subprime adjustable-rate mortgages.
• 😀 The discussion centers around mortgage-backed securities (MBS), which were profitable for banks due to a 2% fee on each bond sold.
• 😀 Subprime mortgages, which are riskier loans given to borrowers with poor credit, started to fill the MBS, making them less reliable despite being labeled 'AAA'.
• 😀 Michael is convinced that when the adjustable rates on these subprime loans reset in 2007, many of them will fail, causing the mortgage bonds to become worthless.
• 😀 The character Lawrence initially dismisses Michael’s concerns, but Michael insists on betting against the housing market by shorting the bonds.
• 😀 The Wall Street industry uses complex terminology to keep their operations obscure and to make it seem like only they have the expertise.
• 😀 Michael is determined to profit from the predicted collapse of the housing market, despite resistance from others who don't see the danger.
• 😀 The bonds, which seemed stable due to their AAA rating, are mostly made up of subprime mortgages, making them much riskier than they appear.
• 😀 Michael plans to short the mortgage-backed securities by finding a way to create a financial instrument that allows him to bet against them.
• 😀 The entire housing market is propped up by bad loans, and Michael believes that once the subprime mortgages begin to fail, the entire system will collapse.
• 😀 There’s a sense of urgency in Michael’s actions, as he feels that once others realize the truth about the MBS, it will be too late to profit from it.

Q & A

What is Michael's primary investment strategy in this script?

Michael is planning to short the housing market by betting against mortgage-backed securities filled with subprime adjustable rate loans, anticipating that they will fail when the adjustable rates increase.

What is the significance of 'subprime' loans in Michael's strategy?

'Subprime' loans are high-risk loans given to borrowers with poor credit histories. Michael believes these subprime loans will cause mortgage-backed securities to fail when their adjustable rates increase, making them a bad investment.

Why does Lawrence dismiss Michael's idea of shorting the housing market?

Lawrence dismisses Michael's idea because he believes the housing market is strong, citing Greenspan's view that bubbles are rare and regional defaults are unlikely. He also seems to think that Michael's approach is too risky and speculative.

What is the key issue with the mortgage-backed securities mentioned in the script?

The mortgage-backed securities are filled with risky subprime loans, which will likely fail when the adjustable rates on these loans increase. Despite being labeled as 65% AAA-rated, these securities are mostly made up of bad loans, making them much riskier than they appear.

How do the banks profit from mortgage-backed securities?

Banks profit by charging a 2% fee for selling each mortgage-backed security. They make billions by bundling mortgages into securities and selling them to investors, but when they run out of quality mortgages, they start including riskier subprime loans to keep the profit machine going.

Why are mortgage-backed securities so complicated, according to the script?

The complexity of mortgage-backed securities is a deliberate tactic used by Wall Street to confuse investors and make them feel as though only the experts can understand and invest in them, making it harder for average investors to make informed decisions.

What role does 'Greenspan' play in the script?

Greenspan is mentioned as an economist who believes the housing market is strong and that bubbles are rare. He dismisses the idea of a housing market crash, which contrasts with Michael's view that the market is being propped up by risky subprime loans.

What does Michael mean by 'shorting' the mortgage-backed securities?

To 'short' a security means to bet against it, expecting its value to decrease. Michael plans to profit by betting that the mortgage-backed securities will fail when the risky loans inside them default, causing the securities to lose value.

What is the problem with the way mortgage-backed securities are being structured?

The securities are increasingly filled with subprime loans, which are much riskier than traditional loans. As these loans start to fail, they will cause the entire security to lose value, rendering the bond worthless, despite its original AAA rating.

What is the significance of the 15% failure threshold mentioned by Michael?

Michael believes that if more than 15% of the adjustable-rate loans in the mortgage-backed securities begin to fail, the entire bond will become worthless. This is the tipping point at which the security's value collapses.