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THE BIG SHORT BOOK PDF

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The Big Short , and even though I wrote a book about the experience, the whole thing Yet the big Wall Street banks at the center of it just kept on. Editorial Reviews. From Publishers Weekly. Although Lewis is perhaps best known for his sports-related nonfiction (including The Blind Side), his first book was. PDF | The Big Short (McKay, ), adapted from the non-fiction novel The Big To begin this analysis, I will discuss The Big Short's rhetorical situation, Image Politics: The New Rhetoric of Environmental Activism. Book.


The Big Short Book Pdf

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The Big Short Also by Michael Lewis Home Game Liar's Poker The Money Culture Pacific Rift Losers The New New Thing Next. global financial meltdown and subprime mortgage fiasco that peaked in , then the book to read is The Big. Short: Inside the Doomsday Machine by Michael . the earlier baseball book Moneyball about the Oakland A's business (and baseball) The Big Short is Michael Lewis's telling of the story of the recent subprime.

Inside The Doomsday Machine Guidebook 5 Mortgage-Backed Security Subprime mortgage loans were actually the composition of a subprime mortgage-backed security.

When the investment banks on Wall Street received the subprime mortgages loans, they sold them to their special purpose vehicle. The risk of the subprime mortgage loans would now be transferred to the special purpose vehicle.

The special purpose vehicle was created mainly for the purpose of removing the risk from the main companies. Readers need to keep in mind that the interest and principal payment were also transferred to the special purpose vehicle. The servicer made those payments to the special purpose vehicle instead of the investment banks then would take those subprime mortgage loans and bundle them into a pool.

This was known as a mortgage-backed security, which is a bond that was backed by mortgages in the case of the book and the financial crisis, these mortgage- backed securities were filled with the subprime loans that were handed out left and right to poor Americans.

Once rated, these newly rated mortgage-backed securities would be sold to investors in the secondary market in pieces which were called tranches. The tranches were divided into three categories, senior, mezzanine, and equity. They were categorized by the rating for the risk of the mortgage bonds.

The senior tranches, which consisted of AAA and Aaa rated bonds would have the least amount of risk, lower payments, or yield and last loss. Inside The Doomsday Machine Guidebook 6 The subprime mortgage-backed securities were usually in mezzanine and equity tranches.

The investors of these subprime mortgage-backed securities would pay the investment banks for the bonds. These funds would free up capital for the investment banks to lend more funds to other borrowers.

In return, they would receive periodic payment for the bonds and the credit risk that came with the bonds. These periodic payments were actually the payments from the borrowers with some fee taken off for the service of the servicer and the investment special purpose vehicle. However, few investors wanted to buy the lower floor tranches because they carried too much risk.

The Big Short: Inside the Doomsday Machine by Michael Lewis

Inside The Doomsday Machine Guidebook 7 Collateral Debt Obligation Since investment banks could not sell these subprime mortgage-backed securities due to their risk, found better ways to sell these bonds to the secondary market.

They sent their subprime mortgage-backed securities back to the rating agencies for rerating. The problem with the rating model was that the senior tranches only consisted of triple A bonds.

We see that the mezzanine tranches had A rated bonds also, which made it really confusing for the rating agencies. However, investment banks were able to convince the rating agencies to rerate these subprime mortgage-backed securities into a new tower, which was known as collateral debt obligation, also known as CDOs.

With a new tower that consisted of a senior tranche, the investment banks sold the collateral debt obligations in the secondary market. Since they contained senior tranches, the secondary market invested heavily in them. Inside The Doomsday Machine Guidebook 8 Credit Default Swaps Credit default swaps were insurance for the subprime collateral debt obligation and the mortgage-backed securities. The mortgage-backed securities and collateral debt obligation holders could purchase protection against default from issuers, which could be an insurance company or an investment bank.

In the book, AIG was one of the bigger sellers of Credit default swaps. Even though they would have to pay the full price if the bonds defaulted, they felt that they periodic payments would be worth the risk.

The subprime mortgage-backed securities and collateral debt obligation holders would pay a periodic premium, which was a small percentage of the value of the derivatives in, which the issuers provided protection against default. Credit default swaps were sold based on the risk of the bonds. The price was cheaper to insure a triple A bond than a triple B bond. It got confusing when collateral debt obligations were involved because collateral debt obligations were rerated mortgage-backed securities.

Investors could get cheaper insurance on triple A rated collateral debt obligations than triple B mortgage-backed security. However, these two derivatives had the same risk because the senior tranches as mentioned earlier were made up of the same securities as the mezzanine and equity tranches.

The issuers were getting tricked into insuring riskier bonds for the same price as the less risky bonds. Credit default swaps proved to be a game changer because they were used by investors to bet against the capital market system.

Some investors, such as Michael Burry, Steve Eisman, and Greg Lippmann predicted that the subprime mortgage machine would crash. So they decided to bet against it by buying credit default swaps. Inside The Doomsday Machine Guidebook 9 Synthetic Collateral Debt Obligation A synthetic collateral debt obligation is almost the same thing as a mortgage-backed security and collateral debt obligation.

The differences are in the composition. Synthetic collateral debt obligations are composed of credit default swaps. Investment banks would invest in mortgage- backed securities and would buy insurance on these bonds. Readers need to keep in mind that investment banks could purchase bonds from other investment banks. They set up a special purpose vehicle with the sole purpose of providing insurance to itself.

The special purpose vehicle would be paid a premium for the insurance it provided to the main companies and would provide the main companies with protection against default.

Since Goldman Sachs was the middleman, they would take money right off the top. The special purpose vehicle would use the funds they received from the investors toward the insurance reserve and would pay the investors a periodic payment, which was a portion of the premium that the special purpose vehicle received from the main companies.

However, the investment banks used it in risky ways to maximize their revenue even though they were already profiting from selling subprime mortgage-backed securities, collateral debt obligations, and credit default swaps. Naturally, since investors such as Michael Burry knew that the market would eventually collapse, he had no problem buying more.

This proved to be a great system for Goldman Sachs because they made money hand over fist. However, this derivative ended up playing a major role in sacking the financial market. Inside The Doomsday Machine Guidebook 11 Characters and Institutions Map Since the Big Short was non-linear by nature, it was hard for readers to fully comprehend when major events occurred.

This is also true for the characters. The amount of characters and major players such as institutions present in the book can give readers a hard time when trying to understand the big picture. With this in mind, we created a character and institutions map that summarizes who they were and the role they played. Characters Greg Lippmann was a bond trader at Deutsche Bank. Greg also attempted to reveal the content of rerated bonds and synthetic collateral debt obligation to AIG Financial Product.

Mentions in Timeline: End of and Summer Steven Eisman Also known as Steven, was a year-old graduate from Harvard Law School who had a niche at looking at the market and spotting problems. He started out working at Oppenheimer and Chilton Investment as an analyst, and then became one of the founders of Front-Point.

After meeting Greg Lippmann, they both bet against the subprime mortgage market. Vincent Daniel Sometimes referred to as Vinny, in the book, worked for Steve Eisman at Oppenheimer, and was one of the first to examine the Moody's database on subprime mortgages.

He discovered the shady accounting method that most subprime lenders were using to make themselves seem more profitable. Vinny was also distrusting of Greg Lippmann; he never understood why he even informed Front-Point Partners about this great opportunity.

Michael Burry Also known as Mike, is probably most notable for his one eye.

He started out studying to be a neurologist at Vanderbilt University School of Medicine. However, he ended up founding Scion Capital and left the field of neurology. He took a very keen interest in credit default swaps on subprime mortgages because he found the lending standard was low and most likely going to fail by reading through dozens of prospectuses.

So he sought out big firms that could sell him these credit default swaps, which led him to Goldman Sachs and Deutsche Bank. Their most notable failure was the fact that no one took them seriously on Wall Street because they were so small, so they reached out to Ben Hockett to obtain an ISDA with Deutsche Bank.

Then bet against the subprime mortgage machine by buying credit default swaps on AA tranches of collateral debt obligations. This agreement helped Cornwall Capital enter the subprime mortgage market with Deutsche Bank and buy credit default swaps on AA tranches of collateral debt obligations from Deutsche Bank. End of , February to May , and January 28 He was a successful trader in his early career and soon ventured out and created a company-backed trading group called Global Proprietary Credit Group and was able to invest in anything he wanted.

He took a vested interest in credit default swaps on collateral debt obligation and started betting on the subprime mortgage machine. He was selling credit default swaps on the same double A-rated collateral debt obligations that Jamie and Charlie were betting against. Mentioned in Timeline: He was clueless and did not examine the content of the credit default swaps that his company was selling to the big Wall Street firms.

He was soon approached by one of his employees, who pointed out this error.

Joe, then, attempted to meet with many of the major financial institutions. However, the big firms claimed that it was impossible for housing prices to all drop at once. Institutions Goldman Sachs One of the leading investment banks in Wall Street during the time leading up to the financial crisis of They managed to control many aspects of the subprime mortgage market by inventing the subprime collateral debt obligation. They also created synthetic collateral debt obligation through the issuance of credit default swaps.

Goldman Sachs convinced AIG Financial Product to insure many rerated triple B subprime mortgage bonds and to issue credit default swap for only. They also convinced the rating agencies to rerate their mortgage-backed security, and synthetic collateral debt obligation. Deutsche Bank bet against the subprime mortgage machine by buying credit default swaps through Greg Lippmann.

They started selling corporate credit default swaps back in the year when J. Morgan invented it. Soon after, Goldman Sachs took an intrest in credit defualt swaps.

They bacame the market place you went to bet on and against subprime mortgages. This was because many investors were clueless of the content within these derivatives.

Many of the things they insured were BBB mortgage-backed securities, collateral debt obligation and synthetic collateral debt obligations. Goldman Sachs took advantage of this and insured a huge amount of BBB rated mortgage bonds and synthetic collateral debt obligations. Ultimately, they stopped selling credit default swaps on subprime mortgage in the year of Mentions In Timeline: However, they did not have a rating model when it came to CDOs so they used the one Goldman Sachs created.

Re-Kindled: The Big Short

The timeline section will be a helpful tool to help readers understand the events that occurred. The financial crisis of actually started in the s, which is almost two decades before the crash. Our timeline begins from s to Characters Greg Lippmann was a bond trader at Deutsche Bank.

Greg also attempted to reveal the content of rerated bonds and synthetic collateral debt obligation to AIG Financial Product. Mentions in Timeline: End of and Summer Steven Eisman Also known as Steven, was a year-old graduate from Harvard Law School who had a niche at looking at the market and spotting problems.

He started out working at Oppenheimer and Chilton Investment as an analyst, and then became one of the founders of Front-Point. After meeting Greg Lippmann, they both bet against the subprime mortgage market. Vincent Daniel Sometimes referred to as Vinny, in the book, worked for Steve Eisman at Oppenheimer, and was one of the first to examine the Moody's database on subprime mortgages. He discovered the shady accounting method that most subprime lenders were using to make themselves seem more profitable.

Vinny was also distrusting of Greg Lippmann; he never understood why he even informed Front-Point Partners about this great opportunity.

Mentions in Timeline: , , January 28 Dr. Michael Burry Also known as Mike, is probably most notable for his one eye. He started out studying to be a neurologist at Vanderbilt University School of Medicine. However, he ended up founding Scion Capital and left the field of neurology. He took a very keen interest in credit default swaps on subprime mortgages because he found the lending standard was low and most likely going to fail by reading through dozens of prospectuses.

So he sought out big firms that could sell him these credit default swaps, which led him to Goldman Sachs and Deutsche Bank.

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Mentions in Timeline: , Early , Early , End of , and September Jamie Mai and Charlie Ledley Two years-old investors, who founded Cornwall Capital, with very limited knowledge about the real estate and capital market. Their most notable failure was the fact that no one took them seriously on Wall Street because they were so small, so they reached out to Ben Hockett to obtain an ISDA with Deutsche Bank. Then bet against the subprime mortgage machine by buying credit default swaps on AA tranches of collateral debt obligations.

This agreement helped Cornwall Capital enter the subprime mortgage market with Deutsche Bank and buy credit default swaps on AA tranches of collateral debt obligations from Deutsche Bank. He was a successful trader in his early career and soon ventured out and created a company-backed trading group called Global Proprietary Credit Group and was able to invest in anything he wanted.

He took a vested interest in credit default swaps on collateral debt obligation and started betting on the subprime mortgage machine. He was selling credit default swaps on the same double A-rated collateral debt obligations that Jamie and Charlie were betting against. He was clueless and did not examine the content of the credit default swaps that his company was selling to the big Wall Street firms.

See a Problem?

He was soon approached by one of his employees, who pointed out this error. Joe, then, attempted to meet with many of the major financial institutions. However, the big firms claimed that it was impossible for housing prices to all drop at once. Institutions Goldman Sachs One of the leading investment banks in Wall Street during the time leading up to the financial crisis of They managed to control many aspects of the subprime mortgage market by inventing the subprime collateral debt obligation.

They also created synthetic collateral debt obligation through the issuance of credit default swaps. Goldman Sachs convinced AIG Financial Product to insure many rerated triple B subprime mortgage bonds and to issue credit default swap for only.

They also convinced the rating agencies to rerate their mortgage-backed security, and synthetic collateral debt obligation. Deutsche Bank bet against the subprime mortgage machine by buying credit default swaps through Greg Lippmann. They started selling corporate credit default swaps back in the year when J. Morgan invented it. Soon after, Goldman Sachs took an intrest in credit defualt swaps. They bacame the market place you went to bet on and against subprime mortgages.

This was because many investors were clueless of the content within these derivatives. Many of the things they insured were BBB mortgage-backed securities, collateral debt obligation and synthetic collateral debt obligations. Goldman Sachs took advantage of this and insured a huge amount of BBB rated mortgage bonds and synthetic collateral debt obligations.

Ultimately, they stopped selling credit default swaps on subprime mortgage in the year of However, they did not have a rating model when it came to CDOs so they used the one Goldman Sachs created. The timeline section will be a helpful tool to help readers understand the events that occurred.

The financial crisis of actually started in the s, which is almost two decades before the crash. Our timeline begins from s to Several factors have a domino effect and it is imperative to know when the catalyst occurred.

In the timeline section, we show how these key characters evolve, and learn more about the financial crisis while making decisions along the way through the years.

Understanding how the mortgage bond works will make it easier to understand the complicated financial instruments that even financial professionals were unable to understand. A major entity to keep an eye out throughout the book. A financial instrument that made profits to those who foresaw the crisis. This was the catalyst that started it all. In the coming years we will see how these industry amateurs were able to see something that many professionals were unable to. This revelation leads Burry to bet against the American economy.

This allowed them to further exploit the system and make profits from it. However, Eisman was not convinced. This would have been huge in the s but was barely mentioned during The financial crisis of This is an important event mentioned in the book since no one truly grasped what was happening to Bear Stearns.

The Big Short Summary

S government decided to absorb all losses in financial system and bailed out Wall Street. The Big Short: Inside The Doomsday Machine Guidebook 21 Lessons Learned As the major financial institutions grew in size over time, the entire economy became too dependent on them for stability. The idea of too big to fail is that letting such major institutions go under would be catastrophic to the whole economy.

Posing such systemic risk, these financial institutions had no incentive to protect their downside. Their behavior would be highly risky. Chasing higher returns which leads to the problem of moral hazard. Such an example of moral hazard would be, a person with basic insurance coverage on his car who upgrades to full coverage. This option makes him more likely to drive recklessly because he will get a bigger check in case of an accident.

Similarly, if the government bails a bank out every time they are at risk of default threatening the stability of the entire financial system why would they be careful? A laissez faire approach to the subprime mortgage crisis would have meant letting all investment banks, that held collateral debt obligations and credit default swaps, collapse and fail on their own.

This was in fact the case with Lehman Brothers when they declared bankruptcy and the Fed stood on the sidelines in The market panic elevated and trades simply stopped. For example, Bear Stearns lost investor confidence and a bank run occurred as a result of rumors of their instability. The Fed could not once again watch it fall the same way Lehman Brothers did. As soon as they announced their intention to bail out Bear Stearns, the market received the message that Bear Stearns is in a lot of financial trouble and is therefore not an institution to be trusted.

The stock prices of Bear Stearns further plummeted and it had to be acquired by JPMorgan at a fraction of the current value. So what went wrong and how did they address it?

From the perspective of the Fed in , they were dealing with nearly all Wall Street financial firms holding billions of dollars of worthless synthetic CDOs on their balance sheets.

They had already learned it was essential for them to act as the lender of last resort for dying firms. They also realized saving these major firms as they fell one at a time would simply result in domino effect of defaults and bankruptcies. With the main goal of bringing back investor confidence in the financial markets, the Fed guaranteed the debts and invested capital proportionally in major financial institutions with respect to their net worth.

With this strategy, not one firm was singled out for being in bigger financial trouble than the other. Require an amount of reserve ratio Companies like AIG did not have a big enough reserve to do the deal that they were obtaining by selling credit default swaps.He was soon approached by one of his employees, who pointed out this error. Inside The Doomsday Machine Guidebook 11 Characters and Institutions Map Since the Big Short was non-linear by nature, it was hard for readers to fully comprehend when major events occurred.

Investment banks would invest in mortgage- backed securities and would buy insurance on these bonds. The investors of these subprime mortgage-backed securities would pay the investment banks for the bonds. He was at heart a proud cynic whose curiosity and doubt enabled him to see through the ignorance, stupidity, false optimism and fraud that characterized an era on Wall Street.

This revelation leads Burry to bet against the American economy. Car loans used to be three years in length. Rating agencies could develop a division that specifically does research on new derivatives and new rating models to ensure the rating of bonds are accurate.

If the banks approved the loan, the borrowers would sign a contract agreeing to pay the monthly interest and principal payment by a certain date.

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