How Is The Big Short Movie Related To The Economy

The mortgage crisis of 2007 marked catastrophe for millions of homeowners who suffered from foreclosure and short sales. Most of the problems involving the foreclosing of families’ homes could boil down to risky borrowing and lending. Lenders were pushed to ensure families would be eligible for a loan, when in previous years the same families would have been deemed too high-risk to obtain any kind of loan. With the increase in high-risk families obtaining loans, there was a huge increase in home buyers and subsequently a rapid increase in home prices. As a result, prices peaked and then began falling just as fast as they rose. Soon after families began to default on their mortgages forcing them either into foreclosure or short sales. Who was to blame for the risky lending and borrowing that caused the mortgage meltdown? Many might blame the company Fannie Mae and Freddie Mac, but in reality the entire system of buying and selling and free market failed home owners and the housing economy.

It’s a risk that these investors took where in the end, they were financially hurt by it due to the part of the subprime lenders acting unethically. Not only the subprime lenders, but also the investors because they started to loose their standards once the subprime mortgages were booming and becoming more profitable. The investors were blinded by the profit and not paying attention to the qualities of business and the loans. Once the investors started to loose their standards, that’s when the subprime mortgages were being overlooked in which they were hurt by it.

However, these mortgages required no income verification, or resources to pay for the mortgage, as long as they signed the mortgage papers. Fanny Mae and Freddie Mac were the lending arms that provided the money. Both are now government run, but formerly were privately held companies, unlike Ginnie Mae, which is fully backed by the government. When the homeowners could no longer pay their mortgages, the house of cards collapsed. With the lack of education in this country, the middle and lower class were greatly affected by the government’s intervention in Mortgage rates. The subprime mortgage crisis can be blamed for much of this country’s economic problems, but we don’t need to point fingers at what went wrong, we need to address the problems and find solutions.

The financial crisis from2007 to 2008 is considered the worst financial crisis since the Great Depression of the 1920s and destroyed the U.S. economy severely. It led the housing prices fell 31.8%, the unemployment rate rose a peak of 10% in the United States. Especially the subprime market, began defaulting on their mortgage. Housing industry had collapsed. This crisis was not an accident, it caused by varies of factors. The unregulated securitization system, the US government deregulation, poor monetary policies, the irresponsibility of 3 rating agencies, the massed shadow banking system and so on. From my view, the unregulated private label mortgages securitization is the main contribute factor which led the global financial crisis in 2008.

In the early-2000s, Moody’s, one of the leading credit rating agencies in the world, evaluated thousands of bonds backed by so-called “subprime” residential mortgages—home loans made to those with both low incomes and poor credit scores. When housing prices began to fall in 2006, the value of these bonds disintegrated, and Moody’s was compelled to downgrade them significantly. In late 2008, several commercial banks, investment banks, and mortgage lenders that had been

In the lead up to the current recession, when the real estate market began to fall, there were so many investors shorting stocks and securitized mortgage packages that were already falling, that the market simply fell further. There were no buyers at the bottom, and the professional investors made millions off of the losses of others. Beyond this, there was no real federal regulation for securitized mortgages, since there was no real way to gauge the mathematical risk of any given package. This allowed the investors to take advantage of the system and to short loans on real people’s homes. Once these securities were worthless, many of the homebuyer’s defaulted on their mortgages and were left penniless. No matter from which angle this crisis is looked at, the blame rests squarely with the managers who began the entire cycle, the ones who pursued the securitization of mortgages. Their incompetence not only led to the losses of Americans who have never invested in the stock market, but to losses for their shareholders.

That brings us to the root cause of the collapse at Bear Stearns. Bear Stearns had begun investing in subprime mortgages through to funds. According to the investment website investopedia [7], a subprime mortgage is basically a mortgage that is given to

The U.S. subprime mortgage crisis was a set of events that led to the 2008 financial crisis, characterized by a rise in subprime mortgage defaults and foreclosures. This paper seeks to explain the causes of the U.S. subprime mortgage crisis and how this has led to a generalized credit crisis in other financial sectors that ultimately affects the real economy. In recent decades, financial industry has developed quickly and various financial innovation techniques have been abused widely, which is the main cause of this international financial crisis. In addition, deregulation, loose monetary policies of the Federal Reserve, shadow banking system also play

Between 2007 and 2008, the impending mortgage crisis met its peak, and subsequent “burst”. In simple terms, over the years leading up to the housing bubble, banks loaned out large amounts of money to the people in an effort to stimulate the economy. Those who originally did not qualify for such large loans, now did. However, these subprime borrowers (borrowers with a poor credit history) often could not actually afford their payments, leading them to file for bankruptcy, and pushing the country closer toward the recession and the collapse of the housing market. The rise in subprime mortgage delinquencies and foreclosures meant a severe decline in securities. As the recession escalated, the wellbeing of financial institutions and citizens alike

With all that being said, the mortgages that were rated as excellent were actually bad for homebuyers. To the homebuyers’ surprise, the interest rates rose and they could no longer afford to pay their mortgages. This meant that the investors lost their money and subsequently stopped buying these mortgage-backed securities. This sent housing prices falling by thirty percent and the stock market falling by fifty percent, and also led to nine million jobs being lost. Some of companies involved in the mortgages, such as AIG, almost went bankrupt as a result. AIG lost all their money because they insured these bad mortgages and had no money to pay for all the mortgages they insured. These companies did this because they knew the Fed would always have their backs. Because the Fed bailed these businesses out, they were essentially allowed to keep making money off of these bad banking practices. According to Mike Collins, an editor at Forbes Magazine, the actual bailout of these businesses turned out to cost $7.7 trillion, about the same as the US national debt at the time. Without the Fed, the free market would have let these businesses collapse, allowing new and better businesses to take their place, or even better, keep companies from using these bad practices in the first place.

Individuals were evicted from their homes and companies downsized in order to combat poor economic conditions. In the film The Big Short, after the “housing bubble” burst, many of the working class individuals that invested their hard earned money were left devastated. The fundamental cause for the collapse was due to the big banks deceitful and fraudulent activity. Those who possessed wealth or were categorized in the upper class bracket were bailed out by the big banks. The financial collapse was one of the first eye openers for the American people.

There has been a debate for years on what caused the Financial Crisis in 2008 and if there was one main cause, or a series of unfortunate events that led to the crisis. The crisis began when the market was no longer funding many financial entities. The Federal Reserve then lowered the federal funds rate from 5.25% to almost zero percent in December 2008. The Federal Government realized that this was not enough and decided to bail out Bear Stearns, which inhibited JP Morgan Chase to buy Bear Stearns. Unfortunately Bear Stearns was not the only financial entity that needed saving, Lehman Brothers needed help as well. Lehman Brothers was twice the size of Bear Stearns and the government could not bail them out. Lehman Brothers declared bankruptcy on September 15, 2008. Lehman Brothers bankruptcy caused the market tensions to become disastrous. The Fed then had to bail out American International Group the day after Lehman Brothers failed (Poole, 2010). Some blame poor policy making and others blame the government. The main causes of the financial crisis are the deregulation of banks and bank corruption.

The problem was everyone who qualified for a mortgage already had one. Lenders knew if they sold a mortgage to a person that defaults the lender gets the house, and houses were always increasing in value in that market, that would be a valuable asset to sell. To keep up with the demand from investors, lenders started selling mortgages to borrowers who wouldn’t have qualified before because of the risk for default. These mortgages are called sub-prime mortgages and lenders started creating tons of them. In the unregulated market, lenders employed predatory tactics to get more borrowers with attractive offers such as no money down, no credit history required, even no proof of income. People never would have qualified before were now buying large houses, and the lenders sold their mortgages to Investment bankers. The investors packed subprime mortgages in with prime mortgages so credit agencies would still give a AAA rating. The rating Agencies who had a conflict of interest by receiving payments from the investment banks, had no liability if their credit ratings were correct or not. They turned a blind eye to the risky CDOs and kept giving AAA ratings. This worked for a while and everyone was happy including the new homeowners. The housing market became hyper inflated with more homeowners than ever. Wall Street continued to sell their CDO’s which were ticking time bombs. The subprime mortgages began

Once things started to get bad, they got really bad for a lot of families who were given mortgages, who were not properly qualified. There was a major spike in defaults, with

Then, in the 1990s, bonds were created consisting of subprime mortgages, which were higher risk mortgages with high interest rates, made to borrowers with lower credit levels. Essentially, banks were handing out mortgages like candy to consumers who were never going to be able to make the payments, but Wall Street kept buying and packaging the mortgages into bonds. Since these bonds were inherently riskier, one wonders why investors were still willing to buy. Investors, who look at ratings by agencies such as Moodys and Standard & Poors, had no reason to believe these bonds were risky investments. The agencies, whom were being paid by Wall Street, were assigning high ratings to these risky bonds.