The Big Short (2015) - Jared Vennett & Lawrence Field learn about Dr.Burry's CDS deal [HD 1080p]

Summary

In this intense conversation, the characters discuss a high-stakes financial deal involving $200 million in credit default swaps tied to mortgage bonds. Randall has made a risky trade, betting against the housing market, which has raised concerns among his colleagues. Despite doubts about the strategy, Randall is confident that the logic behind the trade will pay off, though it involves significant risk and could lead to massive losses if the housing market doesn't fail as expected. Tensions rise as the group debates the future of the company and the consequences of this gamble.

Takeaways

• 😀 Randall's recent deal involves selling $200 million in credit default swaps on mortgage bonds, a move considered unusual and risky.
• 😀 The credit default swaps were sold to a fund manager from California, which is a surprising development for many in the room.
• 😀 The mortgage swaps market has been a point of confusion for some, as this is a relatively new type of trade that some hadn't heard of before.
• 😀 Randall, who seems to have a commanding presence in the trade, has made a deal that others find highly speculative and bold.
• 😀 The trade involves shorting mortgage bonds worth $200 million, which is a high-stakes maneuver in the market.
• 😀 The total liquidity involved in this trade is reported to be around $1.3 billion, raising alarms among some colleagues about the company's financial exposure.
• 😀 Michael, one of the characters, expresses concern about the high risk of the trade, questioning Randall's decision-making process.
• 😀 Randall insists that his trade is logical and planned, even though others view it as dangerously speculative, involving massive premiums paid out on the swaps.
• 😀 The trade’s premise is that the company will lose millions until a rare market failure occurs — a failure that has never happened before.
• 😀 There is internal tension in the company, with Lawrence expressing doubts about the company's overall liquidity, while Randall defends his approach with autonomy over investment decisions.

Q & A

What is the core subject of the conversation in the transcript?

The core subject revolves around a complex financial trade involving $200 million in credit default swaps tied to mortgage bonds. The conversation explores the risks, strategies, and internal disagreements about the investment decision.

What are credit default swaps (CDS), and how are they related to the trade discussed?

Credit default swaps are financial instruments used to hedge or speculate on the credit risk of an underlying asset, in this case, mortgage-backed securities. The script discusses the sale of $200 million in CDS related to mortgage bonds, essentially betting on the failure of the housing market.

Why does Lawrence express concern about the investment strategy?

Lawrence is concerned because the strategy involves heavy risk, betting that mortgages will fail, which has never happened before. He believes this could jeopardize the company's liquidity, and he doesn’t fully understand the logic behind the deal.

What is Randall's stance on the deal, and how does he defend it?

Randall is confident in the deal and defends it by claiming the strategy is logical. He argues that the company will profit from paying out premiums on swaps until the mortgages fail. He also mentions having full autonomy in making investment decisions.

What is the significance of the $1.3 billion figure mentioned in the script?

The $1.3 billion represents the total liquidity tied up in these risky trades, which is a large sum relative to the company's available funds. Michael, the person raising concerns, views this as a critical risk to the company's financial stability.

How does Michael feel about Randall's investment decisions?

Michael is highly distressed and disapproving of Randall's investment strategy. He believes that Randall is taking a huge risk with the company’s liquidity and that this approach may jeopardize the firm’s future.

What is the relationship between Randall and Lawrence?

Randall and Lawrence seem to have a mentor-mentee relationship. Randall believes Lawrence does not fully understand the risks involved in the trade, while Lawrence expresses concern over the deal's potential consequences.

What does Randall mean when he says 'it's all very logical'?

Randall is defending the trade, suggesting that, while it appears risky, the strategy is based on a logical analysis of the market and expected outcomes. He believes that the market will fail, and the premiums paid will eventually be worth the risk.

Why does Michael bring up the 'Inception agreement'?

Michael refers to the 'Inception agreement' to remind Randall of the original understanding that he would not engage in overly risky or reckless investments. He believes Randall is violating this understanding by pursuing the high-risk strategy.

What is the potential outcome of the trade if the housing market fails, according to Randall?

If the housing market fails, Randall believes the trade will be profitable. The company will benefit from the credit default swaps, as they would pay out when the mortgages tied to the swaps default, leading to significant returns for the firm.