How The Big Short educated a generation about the 2008 financial crisis
How The Big Short educated a generation about the 2008 financial crisis

The 2015 Oscar-winning adaptation of Michael Lewis’ book of the same name followed several characters with a background in finance before the global economic crisis of 2007-08. Individuals ended up benefiting greatly from the incident, betting on the collapse of the financial system through bonds containing risky mortgages. The film is often credited as explaining the monetary catastrophe in layman’s terms.

The film ended up using characters played by actors like Selena Gomez, Margot Robbie and Anthony Bourdain to explain the more complex elements of what happened using everyday analogies.

Margot Robbie’s character explained mortgage bonds while sitting in a bathtub. The underlying concept was that Robbie would represent the type of person the community was focusing on at the time as the situation crumbled.

The actress noted that the main reason for the collapse was the formation and abuse of mortgage bonds. Mortgages can be quite stable assets if they are well rated – depending on the recipient – but banks have started to fill obligations full of subprime (subprime) mortgages to make more money from people investing in the obligations.

Anthony Bourdain then explained CDOs (collateralised obligation) using the seafood analogy. A CDO brings together assets such as bonds, car loans, credit card loans and mortgages to sell to investors. These loans, all from different places, are then bundled together and returned to the market as new bonds. Investors in CDOs can subscribe to different levels of risk, ranging from low to high.

On the eve of the crisis, some banks began creating and issuing CDOs with subprime mortgage-backed securities. These CDOs, however, were still rated AAA (meaning very safe) because the rating agencies thought the number was safe, so having multiple high-risk mortgages bundled together was a good bet for investors.

Selena Gomez and Richard Thaler (professor of behavioral economics) then explained how synthetic CDOs were created in another interlude using blackjack. Hybrid CDOs were launched because there was some initial success in CDOs, as Bourdain explained.

Banks have started making hybrid secondary CDOs using different parts of already created CDOs. Think of a car made from the parts of dozens of different used cars. Banks then created synthetic CDOs – the duo explain – which acted as insurance in the event of default on their loans in the form of credit default swaps. Surprisingly, no one thought the loans would default in what Thaler described as the hot hand fallacy.

Imagine if Cristiano Ronaldo had scored in many games in a row and people bet that he has to score every game now. People made this bet and people made side bets that this person would win their bet. This process continued. Eventually Ronaldo didn’t score in a game (people couldn’t pay their mortgages) and things went downhill. People who made money The big court bet on this drop using a mechanism known as shorting.

Simply put, a person selling short borrows shares from someone who agrees to return them on a specific date. Maybe days or years. After the trade, the short seller sells the stock in the market – say for $1,000.

On the day the short seller has to pay, he will repurchase that same stock in the market, but imagine that the value has now gone down, instead of still being $1,000 it is now worth $200. This means that the shortest buys back the stock and delivers it to whoever they borrowed it from while keeping $800 in profit.

This is what ended up happening to many characters in the film but on a larger scale.

Industrial adaptation thanks to the film

Confer Inc. Founder and CEO Yatin Karnik has over 20 years of experience in the mortgage industry and was active during the time the film was set. Spent almost 17 years at Wells Fargo before diversifying with Confer in 2021.

Confer has built an optimization engine that can personalize mortgages through Web 3.0. Aiming to put borrowers in some sort of bargaining position with the lender.

The app compares official loan estimates, recommends the most favorable lender for the borrower’s situation, while modifying the terms of the mortgage transaction to provide a better deal.

Karnik said of the company, “My goal is to democratize finance globally, not just in the United States of America.”

“That goal translates into making money easily accessible to those who need it and those who want to lend. Plus, making it affordable, available, and transparent to lend/borrow money.

“Not having affordable financing in place impacts poor and disadvantaged communities, as they do not have access to the necessary funds. People saw it on full screen during the movie. He added.

“My mission is to make money easily accessible to those who don’t have access to it.”

Incredibly, after the accident, there weren’t many legitimate changes to the procedures except for a few more safety rules.

Confer and others are hoping to change that through blockchain and the new digital age so that there is no reappearance of The big court.

Karnik continued: “I really want to change the antiquated ways in which the financial industry currently operates – which adds unnecessary administrative layers, does not allow for clarity and real power of choice for borrowers, and blatantly lacks the implementing government directives.

“There are glaring gaps and a lack of standardization in the financial lending landscape. My goal is to shine a light on these crater-sized potholes and ensure that leaders at all levels are held accountable to their responsibilities to the American public.


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