2023-08-18 08:27:18
The 2008 subprime mortgage crisis was not just a real estate bubble
Finally, if “the financiers were not unscrupulous voracious people”, the economic crisis of 2008 could have been confined to an explosion of a real estate bubble linked to the granting of mortgage loans to people with poor credit. But where we get into the subprime mortgage crisis as we have known it is that these loans, as we said above, were bundled together and sold as asset-backed securities to investors, the famous “MBS” (mortgage-backed securities). Since an isolated home loan did not interest investors (the risk being too concentrated, because it depended on the repayment capacities of a single person), you have to consolidate several loans into a single financial product and so, it’s magic, the risk is diluted. THE MBS are sliced, and rated by rating agencies between triple A (for those most apt to repay loans) and B (least apt) by rating agencies. What we call “subprime” are the risky tranches, that is to say between B and double BB.
Read more : What is the influence of rating agencies on sovereign debt?
However, banks understand that investors are not fond of risky tranches, so the latter have taken the decision to group them into asset-backed bonds (CDOs), sets where the worst MBS in the basket are mixed with others MBS, and abusively rated triple A by agencies. The CDO is a portfolio of securitized loans which is traded on the stock markets but without really knowing the risks incurred because they are so hidden, diluted and covered by the rating agencies.
Besides, the film explains in a simple way why CDOs have been so successful in a scene where actress Selena Gomez is playing blackjack. Together with economist Richard Thaler, they define how CDOs use theleverage to place bets on bets, thus exponentially increasing the sums put at risk by the securitization of mortgage loans. Larger side bets on Gomez’s blackjack hand are great when she wins, a metaphor for a rising real estate market. However, when Gomez loses his hand – or real estate prices start to fall – these side bets trigger a domino effect that creates bigger and bigger losses.
To go further than what we wrote above, Michael Burry anticipating the end of the party, buys CDS (credit default swap), that is to say insurance contracts, on MBS and CDOs by betting on a massive non-repayment of short-term loans .
Over the years, the indebtedness of Americans is increasing, and so are the repayment rates. So much so that many households are forced to sell their homes to be solvent. Problem: at a time when everyone is drowning in debt, no one can buy houses anymore. Some neighborhoods suddenly turn into a desert. Millions of Americans find themselves without housing, the banks bear the full brunt of the devaluation of real estate. We go into the greatest global economic crisis of the 21st century with banks far too exposed to the non-reimbursement of loans granted.
Read more: From emlyon to Citi: interview with Bruno Marioli
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