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    Big Short Presentation - Tulane Template

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    Dave Sislen
    The document summarizes key events and factors that contributed to the 2008 subprime mortgage crisis. It describes the rapid growth of subprime lending and securitization in the early 2000s, fueled by exotic loan products like option ARMs and no documentation loans. It also discusses how financial innovations like CDOs and credit default swaps helped spread risk but also obscured it. Charts show the housing and stock market boom and subsequent bust, as well as delinquency rates skyrocketing. The document lists some notable facts that highlighted risks building in the system.

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd

    Big Short Presentation - Tulane Template

    Uploaded by

    Dave Sislen
    176 views25 pages
    The document summarizes key events and factors that contributed to the 2008 subprime mortgage crisis. It describes the rapid growth of subprime lending and securitization in the early 2000s, fueled by exotic loan products like option ARMs and no documentation loans. It also discusses how financial innovations like CDOs and credit default swaps helped spread risk but also obscured it. Charts show the housing and stock market boom and subsequent bust, as well as delinquency rates skyrocketing. The document lists some notable facts that highlighted risks building in the system.

    Original Description:

    The financial backdrop to The 2008 Financial Crisis as presented in "The Big Short"

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    The document summarizes key events and factors that contributed to the 2008 subprime mortgage crisis. It describes the rapid growth of subprime lending and securitization in the early 2000s, fueled by exotic loan products like option ARMs and no documentation loans. It also discusses how financial innovations like CDOs and credit default swaps helped spread risk but also obscured it. Charts show the housing and stock market boom and subsequent bust, as well as delinquency rates skyrocketing. The document lists some notable facts that highlighted risks building in the system.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    176 views25 pages

    Big Short Presentation - Tulane Template

    Uploaded by

    Dave Sislen
    The document summarizes key events and factors that contributed to the 2008 subprime mortgage crisis. It describes the rapid growth of subprime lending and securitization in the early 2000s, fueled by exotic loan products like option ARMs and no documentation loans. It also discusses how financial innovations like CDOs and credit default swaps helped spread risk but also obscured it. Charts show the housing and stock market boom and subsequent bust, as well as delinquency rates skyrocketing. The document lists some notable facts that highlighted risks building in the system.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    You are on page 1of 25

    creating global leaders today

    “Mark Baum”/Steve
    Eisman

    Dr. Michael Burry “Jared Vennett”/Greg


    Lippmann

    creating global leaders today


    2008 Subprime Crisis – What Happened?
    Bailed Out Or Gone!!!!

    creating global leaders today


    2008 Subprime Crisis – What Happened
    BWeek September 1, 2006

    creating global leaders today


    2008 Subprime Crisis – What Happened?

    Value of all stocks on the NYSE as of 12/31/16


    +$21,300,000,000,000: $21.3 Trillion

    Value of all homes in the U.S. as of 12/31/16


    +$29,600,000,000,000; $29.6 Trillion

    Housing market is nearly 40% larger as an asset class


    than the sum of all equities traded on the NYSE!!!!

    creating global leaders today


    2008 Subprime Crisis – What Happened?

     “The main thing that innovations in the mortgage


    market have done over the past 30 years is to let in
    the excluded: the young, the discriminated against,
    the people without a lot of money in the bank to use
    for a down payment.”
    Economist Harvey Rosen
    Princeton University
    March, 2007

    creating global leaders today


    2008 Subprime Crisis – What Happened?

    • Subprime
    • Option ARM
    • Teaser Rate
    • Stated Income Stated Assets
    • No Money Down
    • Silent Seconds
    − HELOCS

    creating global leaders today


    2008 Subprime Crisis – What Happened?
    DJIA October, 2006
    to February, 2011

    16000

    14000

    12000

    10000
    November 1, 2007

    8000

    6000
    13,371
    4000 March
    2000 9, 2009
    0

    6,547
    1 2 3 4 5 6 7 8 9 10 11 12 131415 161718 19202122 232425262728 29 30 313233343536 37 383940414243 44 45464748 4950515253

    creating global leaders today


    Case Shiller 20 City Composite Home Price Index 2000-2015

    Average = 3.79%/Year

    creating global leaders today


    Case Shiller 20 City Composite Home Price Index 2000-2006

    Average Price Increase = 13.6%

    creating global leaders today


    Residential Mortgage Debt 1949-2015

    Average Increase In Residential Mortgage


    Debt = 8.3%/Per Year

    creating global leaders today


    Case Shiller 20 City Composite Home Price
    Index April, 2006-February, 2012

    Average Decrease in Home = Prices 7.6%/Year

    creating global leaders today


    2008 Subprime Crisis – What Happened?

    creating global leaders today


    2008 Subprime Crisis – What Happened?

    creating global leaders today


    Delinquency Rate On Single Family
    Mortgages 1992-2019

    11.8%

    2.5%

    creating global leaders today


    2008 Subprime Crisis - What Happened?

    creating global leaders today


    2008 Subprime Crisis – What Happened?

    creating global leaders today


    Basic Securitization Model

    creating global leaders today


    2008 Subprime Crisis – What Happened?
    Collateralized Debt Obligation Structure

    creating global leaders today


    What Is a Credit Default Swap?
    Simply An Insurance Policy

    creating global leaders today


    2008 Subprime Crisis – What Happened?
    Origins of The Credit Default Swap:

    (1) March 24, 1989 Exxon Valdez runs aground in Prince William
    Sound spilling +32 million gallons of oil.

    (2) 1994 – Jury assesses $5 billion of damages against Exxon; Exxon


    draws on JPMorgan line of credit to finance jury award.

    (3) Basel I regulations require JPMorgan to hold $400 million of


    capital against this low yielding loan.

    creating global leaders today


    2008 Subprime Crisis – What Happened?
    JPMorgan employee, Blythe Masters, structures Credit Default Swap:
    (1) JPMorgan pays an annual premium to The European Bank of
    Reconstruction & Development to accept risk of Exxon default.

    (2) By transferring risk, JPMorgan:


    (a) Maintains relationship with huge
    customer,
    (b) Frees up $400 million of capital for other uses;
    (b) Reduces the bank’s profitability, but, also,
    (c) Reduces the bank’s risk!!!

    creating global leaders today


    2008 Subprime Crisis – What Happened?

    Would you buy the insurance on this house?

    creating global leaders today


    2008 Subprime Crisis – What Happened?
    Fun Facts:
    1) Subprime Mortgage Originations/Securitizations
    (a) 1990: $30 Billion Originated, $0 Securitized
    (b) 2000: $130 Billion Originated, $55 Billion Securitized
    (c) 2005: $625 Billion Originated, $507 Billion Securitized
    Subprime Borrowers: FICO score less than 680; worse than 71% of Americans

    2) Interest Only Option ARMs in securitizations


    (a) Early 2004: 5.85% of securitized loans
    (b) Late 2004: 17.48% of securitized loans
    (c) Mid 2005: 25.34% of securitized loans

    3) CDS Pricing
    (a) AAA – 20 bps/year
    (b) AA – 50 bps/year
    (c) BBB – 200 bps/year; exposed if underlying pools lost 7% of value

    creating global leaders today


    2008 Subprime Crisis – What Happened?
    (4) Steve Eisman’s Baby Nurse owned 6 houses as investment properties

    (5) “Big Short” investors sought out portfolios with “Barbelled” FICO scores

    (6) July 17, 2007 $1.6 Billion in AAA rated CDOs controlled by Bear Stearns funds declared to
    be worthless

    (7) Defaults within OOMLT 2005-3


    (a) Feb 25, 2007 – 15.6%
    (b) June 25, 2007 – 18.68%
    (c) August 25, 2007 – 25.44%
    (d) December 25, 2007 – 37.7%
    Possibly as a result of 2 year teaser rates built into loans originated in 2005.

    (8) “Dude You Owe Me $1.2 billion” Deutsche Bank/Morgan Stanley dispute as to value
    AAA tranches of CDOs.

    (9) Mid 2007, International Monetary Fund estimates losses on US originated subprime
    mortgages at one trillion dollars ($1,000,000,000,000.00).

    creating global leaders today

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