Name: Pedro E.

Hache
Date:

Assignment #7 – THE BIG SHORT MOVIE _MORTGAGE MARKET ASSIGNMENT

Due in TURNITIN at 8:00PM on Sunday February 26, 2017

1. In your own words, what did you learn about the U.S. mortgage market, housing market and financial market from
watching the Big Short Movie?

After watching the Big Short I learned that not only was the housing market completely unregulated and easy-going per se, but
that anyone with interest could easily acquire multiple properties. I remember living in Santo Domingo, Dominican Republic, and
listening to stories on how the value of property in South Florida was just on the ground. Now I understand. Lenders would
approve mortgages to anyone who asked, without expecting them to default. One person in the film commented on how “safe” it
was to lend for hosing since they had the idea that people rather starve than not pay their mortgage since they’d prefer a roof to
live under. Nonetheless credit agencies were tricking investors into buying what they called “junk” bonds, which were highly
rated, but poorly valued.

2. (a) Please explain what a Subprime Mortgage is. (b) How did the movie discuss it?

A subprime mortgage is a loan or line of credit offered to borrowers with low credit score. The idea is to ease the lender
by compensating them for engaging in high-risk lending. The movie showed this by explaining how the market
inaccurately rated bonds as AAA when they were really just BB.

3. (a) Please explain what an Adjustable Rate Mortgage is. (b) Would you want one, explain why or why not?

An Adjustable Rate Mortgage is the term used for loans without a set fixed interest rate. Instead, the rate is set by the
performance of the market. I’d much rather have fixed interest rates since it is impossible to predict the market. This
can be very beneficial for the borrower, but also very dangerous.

4. (a) What did Mike Burry (Christian Bale) discover in 2005? (b) What did he do? (c) Why didn’t anyone believe him?
(d) How much money did he make from his actions? (e) Do you think it’s fair that he made so much money?

In 2005 Mike Burry discovered that most CDO’s were lent to people with credit scores bellow 550. He predicted the
inevitable, which was that a vast majority of borrowers would default on their mortgages. He then continued by
shorting AAA bonds and creating credit defaults swaps. These were bets against borrowers defaulting in their
mortgages. He went to several big name financial institutions and did the same. No one believed him because of what I
said above, “its mortgages, who doesn’t pay their mortgage”. By betting against the housing market, Mike Burry made
$100 million for himself, and another $700 million for investors. Was it fair? Absolutely. He was smart enough to see it
coming and risky enough to bet against it. If he were to be wrong he’d lose a load of money. Would it be fair if he were
to loose all that he invested?

5. When Baum (Steve Carrell) and his team visit Miami, what do they learn about the mortgage and housing market?

Baum visited Miami to see what Mike Burry believed was happening. He saw abandoned homes, unpaid mortgage
bills, property valued by the floor by people desperately trying to sell. He saw people that owned 4 and 5 properties. He
learned that Burry was right and that he had to be part of it.

6. (a) Why did the Miami Mortgage Brokers, that Baum and his team met, brag that they didn’t verify if the people they
made loans to had a way to repay the loans? (b) Why do you think the Mortgage Brokers didn’t care? (c) Do you think the
Miami Mortgage Brokers acted fairly? (d) Should the Miami Mortgage Brokers be blamed for the market collapse?

Miami Mortgage brokers were confident that if borrowers were to default, the banks would eventually buy these loans and sell
them as CDO’s to investors. They didn’t care because they believed banks would eventually bail them out. Did they act fairly? I
wouldn’t say so. I think they were taking advantage of low-income people who wanted property and they knew it. They shouldn’t
be blamed entirely, but they sure are part of it.
7. (a) What was a Standard and Poors Rating supposed to mean? (b) Why didn’t Standard and Poors rate the risk
accurately? (b) Why do you think the movie showed the Standard and Poors Representative, who met with Baum and his team,
wearing blinders? (c) Did Standard and Poors act fairly? (d) Do you think Standard and Poors is to be blamed for the market
collapse?

Standard and Poor Rating, most commonly known as S&P, is the worlds leading index provider with a vast number of
credit ratings. They failed to accurately rate bonds by awarding BB bond a AAA rating. I think the blinders were a
metaphor of how they were doing business at this time, blindly. They have much to be blamed for as they tricked
investors into believing these bonds were highly rated.

8. What type of fraud did you see in this movie?

I) Securities portrayed as safe investment

II) Inaccurate rating of bonds

9. (a) Why does Ben Rickert (Bradd Pitt) tell Charlie Greer and James Shipley not to celebrate when they earn millions
from the market collapse? (b) Do you think Ben Rickett (Bradd Pitt) was right or wrong in this advice? Why?

Ben Rickert told Charlie Greer and James Shipley not to celebrate their winnings since they were a result of the collapse of the
US Economy, essentially meaning the bankruptcy and loss of many American people.

10. Why did the Press (even, the Wall Street Journal) resist printing stories to warm the public about the market collapse?

I didn’t find this clear, however I believe this was done to maintain relationships with banks and cover their mess.

11. Why didn’t the U.S. Government fix the problem?

The U.S, Government thought it would not be fair for taxpayers to pay for banks and a couple of people mistakes.

12. How do you feel about the U.S. economic, financial and housing system after watching the movie?

After watching the movie I learned that rules and regulations only come after economic catastrophes like this. I also
learned that greed drives people. Most who were involved in the housing market where there to make a profit and were
unaffected by the loss of others.

13. Is it fair that a few people profited from the housing crisis, when thousands of people lost their homes, jobs and
savings?

As I said above, it was a bet. I sont want to use the word fair because I understand many people lost everything. I do however
think people who bet against it were also engaging in a risk and they had to act for the benefit of their clients.

14. Why does the movie open with Mark Twain’s quote “It ain what you don’t know that gets you into trouble its what you
know for sure that just aint so.”

People were so confident that the housing market wouldn’t collapse that they “knew for sure”. However this proved to be “just
aint so” and resulted in great trouble because of the confidence people had.