The Big Short 1
Melissa Barth
BA-2008-202: Macroeconomics
Dr. Pierson
March 19th, 2017
The Big Short & the Recession of 07’ & 08’
During 2007 and 2008, America, as well as a number of other countries, experienced a
major financial crisis which it hadn’t seen since the Great Depression (McConnell, Brue, Flynn,
& Walstad, 2012, p. 290). The crisis was called the Great Recession which a recession is “a
significant decline in activity across the economy, lasting longer than a few months”
(“Recession”, 2003) and is indicated by “two consecutive quarters of negative economic growth
as measured by a country’s gross domestic product (GDP)” (“Recession”, 2003).
Specifically for America, the recession was caused by the banks giving mortgages to
people who could not afford to pay them which caused a housing bubble, “a run-up in housing
prices fueled by demand, speculation and exuberance” (“Housing Bubble”, 2017). The banks
then securitized, “the process of slicing up and bundling groups of loans, mortgages, corporate
bonds, or other financial debts into distinct new securities” (McConnell et. al, 2012 p. 291), all
the sub-prime mortgage loans, “high-interest-rate loans to home buyers with higher-than-average
credit risk” (McConnell et. al, 2012, p. 290), into bonds and securities to which they “sold to
big-time investors, including pension and hedge funds, under the pretext that they were
extremely safe investments” (Wolff-Mann, 2015).
Sadly though, these investments were not safe at all and were actually pretty worthless
which is what Michael Burry, Jared Vannett, Mark Baum and his team, Jamie Shipley, & Charlie
The Big Short 2
Geller realized. In the film, The Big Short, Jared Vannett explains to Mark Baum and his team
how worthless the bonds are by comparing basic and modern mortgage bonds. He says “The
original ones were simple, thousands of AAA mortgages bundled together and sold with a
guarantee from the US government. But the modern day ones are private and are made up of
layers of tranches, with the AAA highest rated getting paid first and the lowest, B rated getting
paid last and taking on defaults first. Obviously, if you’re buying B levels you can get paid more.
Hey, they’re risky, so sometimes they fail…But somewhere along the line these B and BB level
tranches went from risky to dog shit. I’m talking rock bottom Fico scores, no income
verification, adjustable rates… Dog shit. Default rates are already up from 1 to 4 percent. If they
