Samuel Frederick

Humanities Honors
March 14, 2016
The Big Short - Writing Response
Wall Street has always intrigued me; the people that work there seem as ridiculous as
their returns, and their returns seem as ridiculous as their mindset. It seems as though it is a
mystery to fully understand how the money making machine operates, and even more of a
mystery to understand the mindset of the individuals who run the machine. Although with a
slight observation of the Wall Street system, you could easily relate one thing between most
people who work there: avarice. They all have the same undying desire to dominate the financial
markets to achieve tremendous financial success, but the strategies some take to achieve such
success is something most people would define as immoral. Such actions posed a threat not only
to Wall Street, but all of the United States. Wall Street firms were so blinded by their avarice that
they had failed to anticipate the consequences of what they had created. Undermining the
housing market had created tremendous opportunity for few individuals who managed to crack
the code before it was too late, thus resulting in, the BIG short.
One of the most intriguing, core features of Wall Street would simply have to be the
nature of it. Wall Street entrepreneurs all have one thing in common: greed. Greed is the
emotion that causes the individual to exploit systems, and other people in order to get what they
want. There are also many more different features that contribute to the Wall Street system, and
they all fall into the Pyramid of Success representation (not John Woodens pyramid). At the
bottom of the pyramid you have the starting positions and interns who don't contribute or learn
anything very important. Then there is the apex of the pyramid who are the CEOs, Hedge Fund

Managers and etc These are the people who are in charge, they can make their word heard and
drive the system forward. However, in between these two substantially different layers you have
many smart individuals competing with one another. The competition creates a very confusing
system. Many new strategies are adopted, new ways to make money are created, and many new
terms are used. To make the Wall Street money machine look complex, sound complex, and feel
complex it needs to be complex. Wall Street entrepreneurs need to be talking about things that
you don't know about, and using words you don't understand to make you feel as if there is too
much to learn. They want you to look at the system and walk away, after all it's hard to fully
understand what CDOs, Synthetic CDOs, MBS, CMO, and CDSs actually mean and understand
how Wall Street actually uses it to their advantage. This is what draws much of my attention, the
competitiveness, and the mysteries behind the money making machine.
Big Wall Street investment banks were making a killing from investors by selling
mortgages. They would pool together several hundred mortgages then issue bonds to investors
using those assets as backing. Each month when the mortgages got payed the money was
transferred to the investors who had bought these bonds. These are called Mortgaged Backed
Securities (MBS). These MBSs were soon pooled into something called a trust. These trusts
are specialized with either triple A rated bonds or all the way down to triple B rated bonds.
Investors could invest in the specific trust they wanted (triple A rated being the safest and triple
B rated being the riskiest) and receive the payments monthly. However, these ratings were being
given by untrustworthy rating agencies. Triple B rated bonds were much cheaper for the
investment banks to create, and soon the exploitation and greedy actions would take place. Large
investment banks would pay rating agencies such as Moodys or S&P to give triple B rated
bonds a triple A rating. These two rating agencies were also fierce competitors and if they were

to decline the request, the investment banks would goto the rating agencies competitor which
would fulfill it. So now these investment banks were filling triple A rated bonds with triple B
rated mortgages, essentially lying to the investors and turning a large profit. This is something
that not a lot of Wall Street bankers knew that was going on, however, there were some people
who decided to check these bonds to see what sorts of mortgages the banks were issuing
investors. They were very surprised with the results. Default rates were rising on these mortgages
which would create a unreal opportunity for these few individuals to sell short on these bonds
and turn a huge profit that was close to 20:1. Although it wasnt that easy to sell short on these
bonds since there was no way to actually short the housing market. This was a serious problem.
Through short time the hedge fund manager created a way to sell short on these bonds, it
was called a Credit Default Swap (CDS). The hedge fund manager would borrow the bond from
the seller (in this case the investment bank) and would agree to pay the full amount back within a
specific time in the future (whether it be two days or two years). Once the borrower had received
this bond he would decide when he wanted to sell it. Say he sold the bond for 1k at current
market price, if he was correct and the bond indeed went down in price he would buy the bond
for cheaper, say $500 and give back the bond he recently brought to the investment bank. He just
made $500. So now that the hedge fund manager named Michael Burry has a way to sell short
these bonds he immediately used $1 billion of his own investors money and shorted the market.
People thought he was insane, and so did his boss. Many people had disagreed with his precisely
planned decision to sell short on these mortgage bonds, and believed they had the evidence to
back their idea. But capitalizing off others mistakes in Wall Street is the name of the game.
Fierce competition and extreme greed had caused most of the Wall Street community to
disregard these indications of a short market. The investment banks were making such extreme

amounts of money that there was no problem with this small percentage of defaulting mortgages
rising. Some investment banks did not understand, or even try to understand what CDSs were,
and what CDOs were being filled with. They were oblivious to the fact that Moodys & S&P
were being paid to lie. They not only failed to understand, but the had failed to care. As long as
the investors were getting scammed and the investment banks were receiving the money it was
all good, no questions asked. Not only were they eager to scam the investors buying the bonds,
but they were eager to sell CDSs to the hedge fund manager. The housing market was as stable as
a rock. There were no previous ways to trade the market since there was no volatility, nobody
needed to trade it. Once the investment banks heard that a hedge fund manager from Scion
Capital wanted to sell short 1 billion dollars they immediately jumped on the opportunity. They
would charge a fixed interest rate each month the subprime mortgages would raise in price,
making it an ideal, too good to be true, trade for them. This however was true for both sides.
After short time the trade rang to be true... unfortunately. "If we're right, people lose homes.
People lose jobs. People lose retirement savings, people lose pensions. You know what I hate
about f*cking banking? It reduces people to numbers ever 1% unemployment goes up, 40,000
people die, did you know that?" (Ben Rickert). Since the time the hedge fund manager from
Scion Capital entered the trade default rates had raised 11%. It was an ideal trade on a
unfortunate subject.

Wall Street limits are reflected upon its greed, in other words, limitless. As long as
powerful individuals control systems with such financial power, most anything can be made
possible. With extreme greed and power causes many problems for the whole economy. If
someone with this power makes decisions to scam clients, exploit others, and disregards

meaningful information, than unfortunate events are bound to happen. Wall Street is a place of
extreme possibility that is founded off the mistakes of investors and struggling economic
communities. Many actions by the super powerful and super rich should never have taken place.
In conclusion to The Big Short its the Wall Street firms poor choices that had contributed to
the housing market crash. It is the greed and avarice that had blinded their vision to make them
fail to anticipate the consequences of what they had created. It was the few individuals who had
taken advantage of this situation, making millions off of other people's downfall.