The movie Big Short is based on Michael Lewis’s book “The Big Short: Inside the Doomsday Machine.” The book is based on real-life events that happened during the 2008 crisis. However, The Big Short’s ending is a complex mix of satisfaction and disappointment. So, let’s see what exactly the ending of the big short is.
In the movie, we have seen three groups of guys, Michael Burry, Mark Baum, and Brownfield Fund, bet money on the fall of the housing market.
When people started defaulting on their home loans, the housing market started to fall. But initially, the actual housing index did not move. Because the banks were busy minimizing their own losses and were buying more swaps. The banks thought they could maneuver the slight decline in the market by suddenly buying swaps. But the loan defaults were on such a high scale that the market eventually fell. And it ended differently for all three groups of guys. All these guys had bought the credit default swaps, and as the market started to fall, it was time to make money from these swaps.
Contents
Brownfield Fund Guys
Let’s see the end for the Brownfield Fund guys,
Charlie and Jamie had bought swaps from various banks, and as the market fell, they grew concerned about counterparty risk. They worried that the institutions they bought the swaps from might not be financially stable enough to pay out if the housing market collapsed. These guys got very worried when Bear Stearns had problems around August 2007.
They could have waited for the housing market to fall more and could have cashed out the full amount. But that would have turned out to be very risky. They didn’t have an ISDA to sell their swaps. Dealing with institutions without an ISDA did put them in a weak position. So, they didn’t have many options to sell. They had Ben Rickert, an experienced ex banker, on their team. He knew how to sell to these wall-street bankers, so they asked him to help them.
Charlie and Jamie sold their swaps to Credit Suisse for $80 million. Actually, they had invested $12 million in credit default swaps, which promised a return of 25 to 1. So, if they would have waited long enough for a complete collapse of the housing market, they could have made a profit of $300 million. But they chose to sell their swaps for $80 million, as they thought that’s sufficient money for them. Credit Suisse bought their swaps because they had made losses on their other trades and they wanted to minimize their losses. Overall, in the end Charlie and Jamie turned their $12 million investment into $80 million.
Michael Burry
Let’s see the end for Michael Burry.
While buying credit default swaps, Michael Burry specifically avoided buying them from the Lehman brothers and Bear Stearns. He had studied these banks and figured out that these banks would most likely won’t be able to pay him back because their exposure to the housing market was much above their risk capacity. So, Michael Burry bought those swaps from other banks, such as Goldman and Deutsche. We have explained how much Lehman was in trouble in this video, make sure you watch it.
Once the housing market started to decline, Michael Burry was calling Goldman for a week to sell his swap positions, but the people at Goldman were busy securing their own positions and buying the swaps from various people.
During 2007, under constant pressure from his investors, he sold most of the credit default swaps at a substantial profit. By early 2008, he feared that there would be a government intervention and that banks might get bailouts from the government. So he exited all of his remaining credit default swap positions by auctioning them to the many Wall Street banks that were themselves by then desperate to buy protection against home loan defaults. Michael Burry was smart enough to anticipate a government intervention and sold all his swaps well in advance of the government bailouts.
At the end, Michael Burry sold his swaps for $1.4 billion and made a profit of $700 million for his fund.
Burry Closed Scion Capital
After making such a huge profit for his investors and for himself, Michael Burry closed his hedge fund. This was because Burry’s strategy of betting against the housing market was complex and initially met with a lot of skepticism from his investors. They didn’t understand his analysis and grew anxious during the long wait for the market to collapse. This led to investor redemptions, which meant investors were pulling their money out of the fund. There was constant friction between investors and Burry which made managing the hedge fund very difficult for Michael Burry.
Michael Burry was running the fund while facing strong opposition from both his investors and the Wall Street community. It took everything he had to see the profits through those swap trades. Burry was disheartened on many fronts, so he shut down the Scion Capital fund in 2008.
Mark Baum
Let’s see the end for Mark Baum,
Mark Baum was reluctant to sell his swap positions, and he wanted the banks to suffer more. This is because, as the market was falling, mortgage-backed securities were losing more value. As these guys had a short position, it meant the more the market fell, the bigger their profits were. So, Mark wanted to make even more money from these banks by holding his position longer.
Mark Baum’s employees wanted him to sell their short positions because their firm, FrontPoint Partners, was under Morgan Stanley. Mark’s bosses at Morgan Stanley wanted him to sell his positions. But they couldn’t force him to sell because Mark and FrontPoint held pretty much full autonomy for their investments. That’s why Mark Baum was able to tell the Morgan Stanley guys to f**k off. Though his firm was under Morgan Stanley, Mark didn’t really have a boss; actually, he was the boss.
And as Kathy Tao explains to Mark Baum, Morgan Stanley has made a loss of $15 Billion in their subprime trades. By the way we have explained in detail in this video why Morgan Stanley has made those $15 Billion losses. Because of those losses, Morgan Stanley was going to go bankrupt. Once Morgan Stanley would have gone bankrupt, the front point would not have got paid for their short positions, and their clients’ money would have been wasted.
Mark’s colleague’s wanted to sell their Swaps
If Morgan Stanley had gone bankrupt, then FrontPoint as an asset would have been dissolved. Hence, Vinnie and the others wanted Mark to sell their short positions as quickly as possible.
Mark Baum felt so guilty while selling the short stocks because, essentially, the federal government had bailed out big banks like Morgan Stanley to clear their debts. So essentially, the money he got was the government’s, which means taxpayer’s money. The taxpayers needed that money during one of the biggest financial slowdowns but the government was using it to bail out banks.
He was genuinely frustrated by the unethical practices he uncovered and the human cost they would have. Even though he made a substantial profit by betting against the housing market, there is a sense that he wasn’t entirely comfortable with it.
But he was expecting that the government wouldn’t interfere in the issue of saving the banks. Once he knew that anyhow the banks would act evil and would get a huge bailout from the government, then he sold his position.
At the end, Mark Baum was stuck in the profit vs. morality stigma. He struggled with the idea of getting rich from the suffering of others.
Jared Vennett
Let’s see the end for Jared Vennett,
Unlike many of the other characters in The Big Short, Jared Vennett seemed relatively unconcerned by the ethical implications of his actions. He thrived on the financial chaos and saw the housing market collapse as a golden opportunity to make money. The movie shows Jared getting a pay check of $47 million for selling those credit default swaps and making billions of dollars for Deutsche Bank.
That’s how all three groups of guys made money at the end in the movie The Big Short. The Big Short is a very interesting movie, and there is a possibility that there are a lot of things you missed in the movie. But worry not, we have made different videos explaining different aspects of the big short movie. So, you should definitely watch this playlist to learn everything about the Big Short movie.
Watch Video
