The Big Short Essay

The Big Short, a 2015 film directed by Adam McKay, follows three separate but parallel stories of the US mortgage housing crisis. The first story follows Michael Burry, a capital hedge fund manager, who accurately predicts the housing bubble and decides to short the housing market.

The film begins by explaining what would eventually become one of the foundations of the US banking industry, the mortgage backed security, or MBS. A mortgage backed security is an asset backed security where the asset is a typical home mortgage. Mortgage backed securities were authorized in 1968, when President Lyndon Johnson authorized the Charter Act. In addition to creating Fannie Mae, the Charter Act gave banks the ability to sell mortgages to non-bank investment institutions.

Typically after a bank or mortgage company makes a home loan, they then sell the loan to an investment bank who bundles the loan with other mortgages of similar interest rates. This bundle is placed into a shell corporation called a Special Purpose Vehicle, which is specifically

However, banks began to realize that as mortgage backed securities became more popular, they were able to sell their mortgages and recoup the cost of the loan with little or no risk to them. This lead to banks approving variable interest loans to customers that were normally considered ‘at-risk’, also known as a subprime loan. “While subprime rates vary from lender to lender, the Federal Reserve defines a subprime loan as one that carries an interest rate at least three percentage points higher than the rate on a US Treasury bond that has the same term as the loan. Subprime loans may provide credit to responsible people who may not have a strong credit history. However, subprime lending practices can be abusive or predatory, trapping unsophisticated borrowers in a cycle of debt while providing initially large profits for the lender.” ("Subprime Loan",