Answer the questions:

1. What is the idea behind MBS?

A mortgage-backed security is a security that pays its holder a periodic payment based on cash flows
from the underlying mortgages that fund the security.
It will pay periodic payments that are very similar to coupon payments from bonds. These cash flows
come from packaged mortgages that have been bought up by a bank.
The MBS market allowed the investment community to lend money to homeowners with banks
acting as the middlemen. An investor paid for an MBS and was paid back over time with
homeowners’ mortgage payments

2. What kind of fund did Dr. Burry run?

Scion capital privately owned asset management firm

3. What markers indicated the impending crisis?

 Rising prices
 High demand
 Rising interest rate + floating interest rates

4. What do banks do with risky bonds that don’t sell well?
Security them into CDO. Bond with different rating are securitized into CDO.

CDO refers to the broad asset class in which a variety of interest-paying assets are securitized and
sold in the form of bonds. The assets packaged together in a CDO may include mortgages, student
loans, etc.
The investor pays market value for the CDO, and then has the rights to the interest payments on the
packaged assets in the form of coupon payments over time.
A Collateralized Debt Obligation is a type of security that pools together a number of interest paying
assets, and pays “coupon payments” based on those assets’ future cash flows.

5. Why do rating agencies give high ratings to risky bonds and

CDOs?
They get high commissions and they do not want to lose any possible profit.
+ They consider such CDO as less risky because they were more diversified.

6. How did Mark Baum learn that Vennett wasn’t lying about the
real situation on the housing market?
Investigated the situation – check houses + his colleagues told with borrowers + talked to a girl
in a strip bar

6. How did Michael Burry, FrontPoint Partners and Jared Vennett and
Brownfield Capital capitalized on the crisis on the housing market?
They bought CDS.
A credit default swap is essentially insurance on a company’s debt. It is a way to insure that an
investor will not be hurt if the company defaults.
Credit Default Swaps are sold over the counter in an unregulated market.
Here’s how it works: if you own a Company X bond and you purchase a CDS of that bond, and then
if Company X defaults, whoever sold you the CDS has to pay you an agreed portion of what you lost
in the default.
A CDS can be used for hedging, as an insurance policy against your bond defaulting. It can also be
used for speculating: you can purchase a swap expecting the bond to become distressed; when more
investors want insurance, then your swap is worth more, and you sell it at a profit.
CDS prices for European sovereign debt have skyrocketed as foreign markets become more and
more risky.
They got a large payout if the underlying company defaults
+ The swap actually becomes more valuable if the underlying company becomes financially
distressed

7. Why did the heroes of the story attend the American Securitization
Forum? What did they find out?
To clear that the MBS market was a bullshit

8. What were the consequences of the said crisis?

 High unemployment
 Failure of Lehman Brothers’ Bank

9. Did the banks and other organizations which contributed in the

crisis suffer any consequences? Did they review their regulations and
way of doing business?
NO

Find the definitions to the following terms:

Mortgage bonds
subprime bonds - is one that's normally issued to borrowers with low credit ratings.
Mortgage backed securities
A credit default swap
FICO scores - Fair, Isaac and Company - a type of credit score - is a three-digit
number that lenders and credit card issuers use to predict how likely you are to repay them if they
grant you credit

Adjustable rates - is a home loan with an interest rate that can

change periodically. This means that the monthly payments can go
up or down.
 that bases its interest rate on an index. The index is typically the Libor
rate, the fed funds rate, or the one-year Treasury bill. An ARM is also
known as an adjustable rate loan, variable rate mortgage, or
variable rate loan.
Underlying bonds - a bond secured by a mortgage on corporate property prior to other
claims.

CDO
ISDA agreement - International Swaps and Derivatives Association – ISDA - regularly
used to govern over-the-counter derivatives transactions. Over-the-counter (OTC) derivatives are
traded between two parties and not through an exchange or intermediary. The size of the OTC
market means that risk managers must carefully oversee traders and ensure approved
transactions are properly managed.

Scion value
Synthetic SDOs

 Option-pay adjustables - An option adjustable-rate mortgage (ARM) is a type

of mortgage where the mortgagor (borrower) has several options as to which type of payment is
made to the mortgagee (lender).
 Paying an amount that covers both your principal and interest. This is the only way you can
reduce the amount you owe on your mortgage loan with each payment.
 Paying an amount that covers only your interest. Interest-only payments do not pay down
your principal, or the amount you borrowed.
 Paying a minimum (or limited) amount that does not even cover the interest. The interest
you do not pay will be added to your principal loan balance. This increases the amount of debt
you owe.

Teaser rate - A teaser rate is a low, adjustable introductory interest rate advertised for
a loan, credit card, or deposit account in order to attract potential customers to obtain the service.
introductory interest rate that is typically offered for the first few months as an incentive to
choose a certain mortgage program

Delinquency rates - Delinquency rate refers to the percentage of loans within a

financial institution's loan portfolio whose payments are delinquent. When analyzing and
investing in loans, the delinquency rate is an important metric to follow; it is easy to find
comprehensive statistics on the delinquencies of all types of loans.

Hedge fund
SEC
Vocabulary support:
Rock bottom нижний предел
Gully глубокий овраг
To pass yourself off as выдать себя за
To be fueled by подпитываться чем-то
Smug-looking самодовольный
To be on a winning streak быть на полосе удач, постоянно
выигрывать
Moral redemption моральное искупление
Improbable невероятный
Rigged game – подстроенная игра
Fraudulent system – мошенническая система
Face value – номинальная стоимость
Demise – кончина, запустение
Wild hunch смелая, дикая догадка
Jacked «заряжен»
To bail out выпутаться
Collate сопоставлять
Transparent прозрачный
To be exposed – подвержен чему-либо, здесь – уязвим,
подвержен риску
Take-home pay зарплата на руки, чистыми, после вычета налогов
и т.д.
Swap contracts are voided – google “voidable contracts”
Fiduciary – доверенное лицо
Things go south пахнет жареным
Short-sighted thinking – недальновидное мышление