Guest Post by Anthony B. Sanders
Only a couple of days until Paramount Pictures’ “The Big Short” hits the theaters.
As I have discussed before, the movie (and book) is about collateralized debt obligations (CDOs), subprime lending and the crash of the housing prices. The housing price bubble went hand-in-hand with the growth of subprime lending in the mortgage market.
Not to mention the growth of exotic adjustable-rate mortgages (ARMs), acting to offset the decline of real median household income that had been dropping from 1999-2005. The area in electric blue is the focus of “The Big Short” where Christian Bale says the whole housing market is propped up by bad loans.
House prices peaked in 2006 and began a gradual descent to Q4 2007 when house price declines began to drop rapidly.
Enter 2008. Credit default swaps (CDS) were actually well-manned during the early months of 2008 until Bear Stearns realized on the evening of Thursday, March 13, 2008, that they were nearly out of cash. Faced with a slew of withdrawals from worried clients and a sudden pullback from lenders, the firm had less than $3 billion on hand — not enough to open for business on Friday. March 13th is reflected in the red box below. Notice that the blip in Bear Stearns CDS is almost perfectly mimicked by a blip in Lehman Bros CDS.
But then all hell broke loose when potential buyers for Lehman Brothers walked away and they declared bankruptcy on September 15, 2008. Counter-party insurer AIG saw a massive spike in CDS spreads along with Lehman Brothers in the week before Lehman’s bankruptcy.
Of course, it sounds easy to short the housing and CDO market when we know in retrospect what happened. But CDS spreads were not showing much distress until March 2008 and even that distress level was muted (because Bear was bailed out and Lehman wasn’t) until the bankruptcy of Lehman.
Hindsight, as they say, is 20-20. But imagine the losses if you shorted the housing market .. and it rallied rather than crash?
Here is a presentation of Goldman Sach’s Abacus $2 billion synthetc CDO from February 26, 2007 before home prices turned down in a serious way. ABACUS
If the market HAD recovered, Christian Bale would not have been doing this:
If the Game is rigged and up is down and left is right I say fuck it let’s jump on board
I am now selling leveraged positions in Christman tree futures. We are going to buy on Dec 24 as I feel the market will explode after the first of the year. My charts show tree inventories at a seasonal adjusted low point so the time to strike is now.
All TBP readers are offered an exclusive ground floor entry into this high gain oppertunity. Send your money to admin and he will forward it to me for a small up front load.
The wife & I are looking forward to seeing “The Big Short” when it comes to a theater near us.
BTW, we invited our daughter in law and grandson to view the new Star Wars yesterday. Bought the tix on Fandango, got there an hour early and guess what?? NO QUEUE! Yes the theater filled up, but not nearly as frantic as we suspected. And yes we enjoyed it very much.