Who is Jared Vennett in The Big Short? Explained

We all know Michael Burry’s character in the movie The Big Short is based on the real Michael Burry. But what about Jared Vennett? Jared Vennett’s character played a huge role in selling those credit default swaps in the movie. Who exactly is this guy’s character based on in the movie? And how he made money in the 2008 financial crash?

Real-Life Inspiration

Jared Vennett’s character is based on Greg Lippmann. Greg Lippmann is a hedge fund manager, and before 2008, he was in charge of global asset-backed securities at Deutsche Bank.  In the movie, Jared hears at a party that Michael Burry is buying credit default swaps from Goldman Sachs.

In reality, the story is different. The stock market is a zero-sum game. Which means if Michael Burry is making $100 million, someone else has lost $100 million. When Michael Burry was buying credit default swaps from Goldman Sachs. Goldman was just the middleman between the buyer and seller of these swaps.

All the credit default swaps were sold by a company named AIG FP. Michael burry bought those swaps. Burry. Goldman acted as a middleman between these two. AIG FP sold around $20 billion worth of swaps every year, and Goldman got a 2% commission for selling through them, which was about $400 million.

The Middleman Role

When Deutsche Bank saw that AIG FP was selling these credit default swaps and Goldman was earning these huge commissions, they also wanted to be a middleman to earn those huge commissions. At the time, investors were hesitant to bet against the housing market because everybody thought it was stable.

So Greg Lippmann, aka Jared Vennet’s bosses at Deutsche Bank, came up with an idea and asked Lippmann to pretend that he does not believe in the stability of the housing market and that it will crash. Do note that the higher management at Deutsche Bank did not believe that the housing market would crash; they just wanted to show AIG FP that they also have buyers for credit default swaps and that AIG FP should also sell through them and pay them a big fat commission.

Jared Vennett’s Task

Lippman aka Jared was a bond seller and buyer at Deutsche Bank. When his bosses asked him to bet against the housing market, he did it initially, even though he didn’t believe that it would crash. But Deutsche Bank wanted to earn more commissions. So, Lippmann had to find more people who were ready to bet against the housing market.

To pitch the idea properly to potential investors. He assigned his quantitative guy to study the housing market. When Lippmann saw the results of the quantitative guy’s analysis, he figured out that the housing market did not even need to collapse. Even if housing prices stop rising so fast, it will still make a profit on those credit default swaps.

As the banks had given out many bad loans, these loans were rated higher than their true ratings by the credit rating agencies. For example, if the loan has a rating of triple C, the credit rating agencies rated it as BBB. As these loans were not given true ratings by the credit rating agencies. When they started to default, nobody had any idea that these loans would crash the market.

Jared’s Market Analysis

Lippmann’s analysis showed that the loan default rate is about 4%, and if the default rate reaches 7%, then all the -BBB rated loans will go to zero. And if the default rate goes to 8%, then the next level-rated loans, which were BBB, will go to zero.

After this, Lippmann knew the housing market was going to crash. He wanted to make money by betting against the housing market. But he bought the short position against the housing market and was paying a premium of $20 million. He wanted to reduce his premium and risk. So, he wanted more investors who would invest in credit default swaps.

Lippmann thought he could make more money through this. His idea was that he would convince investors to bet against the housing market and charge them a huge fee for buying and selling those swaps. The investors would happily pay his fee because they would be making so much money that Lippmann’s fee would look like peanuts in front of their profits.

This very thing is explained by Jared to Mark Baum and his team in this scene.

So, he started pitching his ideas to other hedge fund managers to invest money in credit default swaps. Lippmann met with so many people and investors who he thought would be interested in shorting the housing market. The people at the time thought the housing market was too stable and could never crash. That’s why even after Lippmann showed and explained to them the potential crisis, they all agreed with his theory, but nobody took the bet.

He received rejections from all of them; most explained that shorting the housing market was not their job.

Jared Vennett Meets Mark Baum

After meeting up with so many of these hedge fund managers and investors, he realized that the people who ran funds specializing in mortgage bond trading were least likely to see the potential crash he was trying to explain to them. So, he went to look for an investor who had done investments in the housing market in the past. Looking for such people, he found Steve Eismann, aka Mark Baum.

Steve Eismann was known to bet against the subprime market. Initially, Danny and Vinny Eismann’s colleagues didn’t trust Lippmann at all. They asked him why he don’t leave Deutsche Bank and start a new hedge fund and then short the housing market. 

But Lippmann knew it would take him six to eight months to set up a hedge fund. And the housing market could crash anytime. So, he didn’t go that route. 

A lot of people knew about the shorting of the housing market because of Lippmann. But only about 100 people bet on it. It was unbelievable that few people had bet on a multi-trillion-dollar mortgage market. 

Vennett’s Effect

Other than Michael Burry, anyone else who made money by shorting the housing market through credit default swaps in 2008 is because of Lippmann. Lippmann had already pitched them his ideas, or they heard about Lippmann’s idea of shorting the housing market from someone else.

From 2005 to 2007, by bringing in different investors, Lippmann had grown the short position in swaps to $5 billion. And in 2007, on the instruction of his bosses at Deutsche Bank, he sold those positions and made a profit of $1.5 billion for Deutsche Bank. This was the highest profit ever made in a single trade until that time. But despite that, the overall losses of Deutsche Bank were $4.5 billion from its long position, where it bet the money that housing prices would go up. So overall, Deutsche Bank was at a loss. 

Jared Vennett did an impossible job

As we look at the past it looks like Lippmann’s job was easy. But his job was kind of impossible. Lippmann was convincing investors to invest in a thing that has never happened in the previous 100 years and he was successful in convincing them. So, Greg Lippmann received a $47 million bonus for making a profit of $1.5 billion on his shorts position. That’s how Jared Vennet, aka Greg Lippmann, made money during the 2008 crisis.

Just before the 2008 crisis, many investment banks were on the brink of collapse and were in super panic mode, watch this video to learn how these banks dealt with this panic ruthlessly without caring about anything.

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