The Big Short

Financial Capers Made Easy To Understand.

What I don't understand from the whole thing: this doctor guy went to the banks and said I want to buy insurance that pays me if other people's mortgages fail. And the banks said, OK. (Which was dumb.) But then the banks started to sell each other insurance on whether or not that insurance would have to be paid out. And then insurance on THAT insurance. And so on. So: how was this EVER a good idea? I understand short selling -- you borrow a share and sell it, on the assumption that when you need to return the share you can buy it at a lower price -- because there's actual skin in the game (theoretically the share you borrow has to exist somewhere first). I also understand margin buying (basically the investment banks are lending you the difference between what you have and what you want to buy on the assumption that A) if you need to pay off the margin call you can sell the shares, presumably for more money than you bought them for and B) the shares you are buying actually exist somewhere and acts as a form of collateral. But this selling each other insurance on conditions they don't actually have any skin in the game on, that's either gambling -- or outright fraud. The insurance payout doesn't have any relationship to the underlying insured "property" (which itself is a terrible word for this situation but you know what I mean).

So people losing their homes -- that part was always going to happen because the loans were always bad. The financial market imploding, though, that was because of this synthetic CDO insurance bullshit they were selling each other. And yes, you have to bail out the banks because while people losing their houses is bad, you can say well they shouldn't have received the loans in the first place, but all the retirement investments that people have tied up in the banks would have been lost as the whole CDO thing unwound and took out all the banks' assets. And the alternative, bailing out a wide range of individuals because they've lost everything, is hard.

But the movie was a lot more fun than financial fraud had any right to be.