The Example of Being Greedy: 2008 America’s Financial Crisis
First of all, the thing that started the collapsing economy in 2008 is Mortgage-Backed Security (MBS) proposed by Lewis Ranieri: when the concept of keeping loans on the book was changed. Bank essentially used this method to gain more money by bundling massive amount of mortgages (about 1000 or more) then sell them to the investor bank which acts as the third party in the form of Collateralized Debt Obligation (CDO) – these mortgages are only a single bond after being bundled. The CDO was diversified into several categories, which are called tranches. Each of these tranches shows the level of the bond risk and, hence, the interest that needs to be paid.
The phenomenon occurred in America was that people believe that the housing market is solid, meaning that there would be no default in the bonds. This assumption was based on the basic statement by banker, who’d like to make money, and even several economists: “who would not pay mortgages?”. Then this led the America and even the world economy was in the beginning to collapse right in 2003 (Investopedia: CDO). But then people have no intention to see this phenomenon.
What happens after 2003 was that the investment bank had started to run out of high-rated mortgages. Macroeconomic trends, on the other hand, show that there are more people who interested to would like to buy houses. Thus, they had to fill bonds with riskier mortgages (subprime mortgages) to make the profit churning. The question is how come these amounts of mortgages – that were bundled into a single bond – were rated? It is assumed that this was caused by the competition between rating agencies like Moody’s, Standard & Poor’s, etc. This indicates that they also intended to make money and therefore forcing themselves to give AAA ratings to the risky bonds before any rating agencies did.
However, in this movie, there are some people that had realized the system is fraudulent – which means that there was some money gone in the middle of the economy system – such as Dr. Michael J. Burry and Mark Baum (a.k.a Steve Eisman).
The fraudulent did not stop there as it is found that there was a mortgage fraud. The demand for having a house was rising as the amount of immigrants was booming. This opportunity was then taken by mortgage broker to adjust the amount of money in the mortgage application. Even worse, these mortgage brokers did not verify the borrower’s income, and so did the bank. Well, this was because both parties (bank and mortgage broker) did not suffer loss as they both were getting paid right afterwards. So, they did not have to be worried about the borrower’s income.
Burry realized the system was fraudulent years before anyone else. He found out that the AAA-rated bonds were mostly filled by subprime mortgages. Even worse, the mortgages have a delinquent for over 30 days. Knowing that the bonds would fail, Burry had hoped to gain much more profit as the outcome of his betting against CDO buyer. Hence, Burry decided to buy these bonds with Credit Default Swaps (CDS) to several banks in Wall Street, with the total of $1.3 billion. The reason why Burry used CDS was brilliant. So it is like insurance on the loan, as if the bonds fail, the CDS seller – which is the bank – would pay Burry the big amount of money.
Meanwhile Mark Baum knew that the world economy might collapse because of the existence of synthetic CDO: where a company or any financial institution bets against other companies towards the outcome of the first bet held by two parties. This synthetic CDO was, in fact, the main key to the collapsing world economy in 2008. As there were so many corporates involved in the bet, the initial investment of millions of dollars can be transformed into billions of dollars just in one night on this CDO.
In fact, what the money they bet on the table was not a small amount of money. So, when the bonds fail, the corporates would suffer massive loss. This means there would be so many people losing jobs. In this situation, the economy doomsday was beginning.
At the end, the bonds really fail or default, that is, when the borrower can no longer pay the loans (as the result of no income verification); that is the first. So the house was taken. But the worst thing is that, the borrowers had their houses rent. So, although a family (or the person who rent the house) had paid his home rent to their homeowner, which is the borrower, they would have to be kicked from their house. It was not their fault however. But, please blame those greedy homeowners. This was bad, knowing that house was mostly rented by immigrants. In addition, these two causes were mostly done by immigrants.
The day came true where, at the end of the movie, Scion Capital had its profit raised up to 489%. That is a pretty enormous amount of profit, in fact. But on the other hand, people really lose their jobs because of this crisis. Finally, people were blaming the poor, immigrants, and teachers for their irresponsibility on taking big loans that they could not afford. So, it can be conclude that, this clueless system has brought all unlucky and the innocent parties to Armageddon.