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The Strategies Used In The Big Short

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Introduction

The film, which is entitled ‘The Big Short’, consists of three different stories revolving on Dr. Michael Burry of Scion Capital, Jared Vennett of Deutsche Bank with Mark Baum and his team from FrontPoint, and Jamie Shipley and Charlie Geller of Brownfield Funds. These protagonists were able to foresee the downfall of the economy which took place in the year 2007. In the movie, they are referred to as the ‘weirdos’ or the ‘outsiders’. They were the few people who, according to the film, ‘saw what no one else could’ and ‘saw the giant lie at the heart of the economy by doing something the rest of the suckers never thought to do – they looked.’ I will discuss as we go along how these people were able to outwit the economic crisis.

Everything that happened in the film in the year 2007 all goes back to Lewis Ranieri’s Mortgage-Backed Security or the MBS. It was because of his discovery that everything went spiraling down which resulted in what has been called ‘the worst financial crisis in modern times.’ According to Margot Robbie, mortgage bonds were pretty profitable for the big banks. They made billions and billions from selling each bond. But when they started running out of mortgages, what the big banks did was to put riskier and riskier mortgages, which they referred to as ‘subprime’ or ‘shit’ to keep making profit out of them. I would like to discuss the film and the strategies used in separate parts.

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Dr. Michael Burry of Scion Capital (portrayed by Christian Bale)

Dr. Burry was the first one to discover and preempt the economic crisis. He saw the impending downfall as an opportunity to make a profit. If it weren’t for him, Jared, Mark, Jamie, and Charlie would not have made fortune out of the economic crisis. Dr. Burry chose not to believe what that Alan Greenspan guy said about the housing market. According to Greenspan, ‘bubbles are regional, defaults are rare.’ Basically, he means the housing market is far way impossible from crashing because it is so solid. For Dr. Burry, the economic crisis was a certainty. He was so sure of it. He said, ‘there were very specific identifiers, extremely recognizable.’ Basically, he meant that it was so obvious that it’s gonna happen and people, even banks, was just too busy and ignorant to notice it. Despite the people around him not believing, he went after what he believes in. He searched for banks that could and would give him what he wants: credit default swaps that would pay him off if the bonds fail. It was a challenge for him at first because people, especially those in the banks, would think that it was such a ‘foolish investment’ and they would even laugh at him. Even Mr. Lawrence Fields (portrayed by Tracy Letts), who he also considers as his mentor, would not believe him. He even got furious at Dr. Burry when he found out that he spent most of their company’s liquidity in shorting the housing bonds. Dr. Burry spent a lot of time in research. It was one of the many strategies he made used which is why he was able to see that half of the mortgage debt was in default. He knew for a fact that ‘these mortgage-backed securities are filled with extremely risky subprime adjustable-rate loans’ and it was just a matter of time when the bond starts to become worthless. He really studied the Top 20 selling mortgage bonds and what mortgage bonds are in each one in order understand it. All people believe that these bonds are just made up of thousands and thousands of mortgages. Only he was able to do it and understand it, without the help of a lawyer.

Another strategy used by Dr. Michael Burry was taking risks. He risked losing 1.3 billion dollars, the majority of their company’s liquidity, for an investment only he understands. He paid monthly premiums until the mortgages fail. He was ready for Scion Capital to go down in the hopes that something phenomenal will happen. Another thing that Dr. Michael Burry did that I kind of liked, but is actually very risky in the real financial world, was when he told his investors that he would restrict withdrawals in order to protect them. If he did not do it, investors would surely have withdrawn their money which will result in him not getting the money he is expecting when the economic crisis starts taking place.

Jared Vennett from Deutsche Bank (portrayed by Ryan Gosling)

Jared Vennett was the second ‘weirdo’ who shorted against the housing bonds. He found out about it through one of his coworker, Doug, who talked to Randall, the one who sold 200 million dollars of credit default swaps for mortgages bonds with a Californian funding manager, who was actually Dr. Michael Burry. After learning about it, Jared took the liberty to study, investigate and evaluate it. In his next scenes, it was shown that he was already trying to convince people (Mark Baum and his team) to also short mortgage bonds. Jared Vennett used the strategy Personal Selling when he went to FrontPoint, met face-to-face with his prospective buyers, Mark, and his team, and communicated with them. He met with them to discuss shorting the bonds or the credit default swap.

Another strategy that I liked was when Jared said and introduced his quantitative that he is Chinese, that he won nationals in China, and that he does not speak English, when in reality, he only won 2nd place in the competition, and that he do speak English. That kind of strategy happens a lot in the real Marketing world. Marketers tend to say things which are just partially true in order to make an impression, and of course, make a sale. In that scene, he did that in order to make them believe more. Jared wanted them to really believe that he is pretty sure of the math, because of his quantitative.

Another strategy used in that scene was Bundling. According to Jared Vennett, whenever bonds become too risky to buy, banks like his company, Deutsche Bank, would repackage it with other bonds that did not sell. When the piles get big enough, it would then be considered as a whole new thing and be given a 92%-93% AAA-rating with no questions asked. This goes to show that not only in the retail industry Bundling happens. It is pretty clear that Bundling also takes place in this Industry and is actually pretty common, especially in the banks. The only difference is, in this Industry, they are referred to as ‘Collateralized Debt Obligation’ or CDO. Another good strategy Jared made use in this scene was Emotional Storytelling. This took place when he was explaining and showing Mark and his team what would happen if tranches from the lower-rated level going up start to fail. It was very clear what message Jared was trying to convey here because of all the emotions he has shown while telling the story. Also, it became more believing and convincing for his listeners.

Mark Baum (portrayed by Steve Carell) and his team Vinny Daniel (Jeremy Strong), Danny Moses (Rafe Spall) and Porter Collins (Hamish Linklater) from FrontPoint

Mark Baum and his team found out about Jared’s intention from a wrong number. The moment they learned about it, they investigated it, starting off with checking the ABX, which tracks the subprime mortgages bond value. After that, Mark sent Danny and Porter somewhere, which in this scene, conducted a Field Research, another great strategy used by FrontPoint Partners several times. They learned that the majority of the houses had already been abandoned because people can no longer afford to pay their mortgages.

Another strategy used by the FrontPoint Partners was Interview. It was shown in the scene where they talked to two mortgage brokers where they found out at that moment that these guys profit by selling their deals to big banks, who are willing to pay higher for the riskier mortgages. Mark even interviewed a stripper in the hopes that he will learn something that he does not know. After learning all these, Mark decided to buy swaps from Jared. In the scene where Mark and his team visited Standard and Poor’s, they interviewed Georgia and learned that they sell and give ratings for fees. Georgia admits that they do this because they are afraid that if they do not give credit ratings, banks would go and do business with their competitors, which is Moody’s. In reality, these things are actually pretty common. Businesses would give whatever the clients want because they are afraid of losing customers to their competitors. In Las Vegas, FrontPoint Partners did several interviews and meetings with people who they think will be able to help them understand why the mortgage delinquencies went up instead of going down. They talked to people who, according to Jared, were probably the people who they are betting against with. In the scene where Mark was having dinner with Mr. Wing Chau, another Interview, he learned about ‘synthetic CDOs’. According to Richard Thaler, the father of behavioral economics, and Selena Gomez, ‘synthetic CDOs’ are the side bets made from the original bets. In the end, the original bets will turn into millions or even billions of dollars.

Another great strategy used by FrontPoint Partners was holding off their swaps until the very last moment. It was good that they waited because it was in that time that their swaps were in great value. One thing I liked about Mark, especially at the end of the film, even if he was sure that he will get a lot of money, his morale was still intact with him. He kind of refused to sell their swaps because he does not want to become like the big banks, the corrupt government and the like. He did not want the immigrants and the poor people to be blamed.

Jamie Shipley and Charlie Geller of Brownfield Funds (portrayed by Finn Wittrock & John Magaro respectively)

Jamie and Charlie were the last ‘weirdos’ who learned about the housing bubble. At first, they didn’t know that the outcome of that impending downfall would actually lead to such economic crisis. All they really cared, in the beginning, was becoming rich. If they weren’t rejected in their ISDA application meeting, they would not have found out about it. They would not have seen Jared Vennett’s pitch right there in the table at the lobby of JP Morgan Chase. Jamie and Charlie had only one simple investment strategy or more like philosophy. According to them, ‘People hate to think about bad things happening, so they always underestimate their likelihood.’ Basically, for them, markets will sell options at much lower prices on things they think will never occur. These two weirdos were able to grow their 110,000 thousand dollars into 30 million dollars just by taking advantages of opportunities like that.

Another strategy these two made use was they enlisted the help of a professional or a very experienced guy in trading, Ben (portrayed by Brad Pitt). They were smart enough to ask for some help and were very humble to admit that they know nothing about these things and that they only wanted to be rich. Through Ben, they were able to meet and talk to people they want to do business with. Going to the American Securitization Forum in Las Vegas was also a good strategy for Jamie and Charlie. They tried their best to talk to people who will be able to help them understand what’s happening with their shorted mortgages. Even if the two weirdos did not know much about these things, they did not let it hinder them in socializing with people, asking them about those sort of things. The scene where Jamie and Charlie spent time with the two guys in the firing range was actually a good strategy. In the real Marketing world, it is a good idea to take that certain someone- someone who is probably important- outside. You spent time with them outside the office if you need something from them. This will actually help them get to know you and see that your intentions are good, which will probably result in them trusting you and, even better -helping you.

Another strategy made by Jamie and Charlie was they made a deal no one can refuse. They were very gumptious. They always find ways so they will not lose whatever they have. They bet against the AA tranches, which no one in the world has ever done, even Dr. Burry, Jared, and Mark. That strategy was a very great idea.

Conclusion

In the end, everyone got what they wanted. They got their money, a lot of it actually. But all of them learned something from it. Everyone remained humble and became gracious of everything. Dr. Burry decided to close down the fund because he feels sad that everyone he respected does not talk to him anymore. Mark Baum, according to his wife, became more gracious and became a better person. Jamie and Charlie became rich, but they were not happy, unlike what they were expecting. Jamie continued to run Brownfield without Charlie, who left New York.

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