I spent an afternoon watching the 2015 movie "Big Short" about the subprime mortgage crisis. It is really difficult for a financial novice like me to figure out what the plot is saying. I have to pause N times to check the relevant financial terms. What do you mean. The following is my understanding of the plot of this movie. There may be a mistake, and I will correct it when I watch this movie in the future.
First use a diagram to show the direction of money flow, and the arrow to show the direction of money flow
In the initial state, real estate is booming and the mortgage repayment rate is high
Subprime mortgage crisis occurs: Since subprime mortgages have very low credit requirements for lenders, people who have no deposits and no income can apply for subprime loans, and subprime loans have floating interest rates. If interest rates rise too much, loan debtors will If you can’t pay back the money, people who bought subprime mortgage bonds will feel that the bank can’t get back the subprime loans, and then sell the bonds in their hands, and then the price of the bonds will drop. The compensation for the swap is given to the short seller. Banks can easily go bankrupt under double losses.
1. In the early days of the subprime mortgage crisis, although some people could not afford to pay their mortgages, the prices of mortgage bonds rose instead of falling. The major rating agencies all rated the banks as AAA in order to keep the bank customers who came to the institution for rating. The actual situation is not so good. The public who only pay attention to the ratings of banks believe in the ratings and are convinced that the banks are solvency of mortgage bonds and are optimistic about the situation of mortgages. Therefore, instead of selling the bonds in their hands, they rushed to buy them, so the bond prices rose instead. high. Short sellers pay a large premium/mortgage to the bank for this.
2. A bank clerk also expected that the mortgage would collapse, so he persuaded Mark's fund company to buy swaps for vacant loan bonds. First, he would get the money from the sale of swaps to improve his performance, and secondly, if the mortgage bonds If the price drops, he may get a share of the Mark’s fund (he may also have bought mortgage bond swaps or Mark’s fund shares)
3. Since the risk of subprime loans such as B.BB.BBB is greater than the risk of A.AA level, the volatility of subprime mortgage bonds is also greater. When it rises, shorts need to add more premium/collateral. Conversely, because the risk of A.AA loans is small, the fluctuation of A.AA mortgage bonds is small, and shorts do not need to add a lot of premiums. However, due to the fact that the rating agencies/banks do not reflect the truth, the so-called A.AA loans are actually In fact, it is also made up of many subprime loans, so the repayment risk is also very high. It’s just that the public doesn’t know about it
4. COD-I need Baidu to understand what this is. It should be similar to a bond fund. But bond mutual funds are all investors who bear the loss/profit of a basket of bonds bought by the fund together. On the other hand, COD bears the loss and profit of the bonds purchased in a gradual manner. When a loss occurs, the low-level COD first bears the loss, then to the intermediate COD, and then to the high-level COD. Investors can choose different levels of COD products according to their own risk tolerance. (I don't know if there is any error in understanding?) If the price of the bond you buy increases COD, you will make a profit, otherwise you will lose.
5. COD manager-is the person who decides which bond to buy. He will buy bank mortgage bonds first, because then the bank will introduce customers to this COD and ask customers to buy this COD too. However, the bonds purchased by these CODs are good or bad. Many CODs that bought B.BB bonds are rated AA CODs. And some CODs will continue to buy CODs in addition to buying bonds, and the leverage is very large, such as Speaking of a 1:1 COD, when the price of the bond held by the COD rises/falls by 1%, the price of the COD also rises/falls by 1%. If another COD buys a bond/a 1:1 COD, but the odds are 1:20, then the bond price/1:1 COD price rises/drops 1%, the price of the 20 leveraged COD will rise/ Down by 20%.
6. When the COD manager anticipates that more and more people will not be able to repay the mortgage (the subprime mortgage crisis occurs), what he first wants to do is to quietly sell the mortgage bonds on his hands to the unsuspecting public, and then sell them again The swap of mortgage bonds to make a profit when the price of mortgage bonds falls.
7. When the subprime mortgage crisis occurs, banks cannot collect the subprime loans (loss 1), while paying the shorts' high swap compensation (loss 2). This will easily lead to bankruptcy (Lehman Brothers Bank) ), when these banks go bankrupt, he will no longer be able to repay the swap compensation and the principal interest of the bonds issued, and the swaps and bonds will be worthless. Therefore, the shorts must sell the swaps to banks as soon as possible to cash out.
8. The staff of the creditor's rights department of Morgan Bank, because they also bought the swaps of B.BBB mortgage bonds, but when the price of these subordinated bonds fell, they did not have enough money to pay the mortgage, so they sold more A.AA bonds. After the subprime mortgage crisis, these A.AA-level subordinated bond swaps need to pay shorts up to 15 billion U.S. dollars, which is enough to bankrupt the bank.
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