Key insights
- The post questions the portrayal of CDS on AAA MBS in 'The Big Short,' suggesting the movie overemphasizes the riskiness and cost associated with these instruments. It argues that premiums should have been low, not high, given the AAA rating, and that profits could be generated from weakening credit quality, not just outright defaults. This implies a potential misrepresentation of market dynamics for dramatic effect, with a slightly bearish sentiment.
In the movie The Big Short, Michael Burry buys CDS against the housing market, betting against a market which historically has done very well. Okay, fine. But 1. The movie acts like Michael Burry invented the CDS, which... No he didn't, and 2. Because he was the first to do so he has to pay very high premiums. If Burry is betting against AAA MBS, shouldn't his premiums be low, not high? Also, the movie acts like for Burry to be right, the defaults have to occur. But being long CDS generates profit any time there's weakening in credit strength. The housing market doesn't have to break for Burry to profit, just bend.
TLDR; the movie The Big Short makes CDS on AAA MBS seem bonkers, but it shouldn't be. Am I missing something? Does the book frame things in a more realistic fashion? Is the reality dramatized for theatrical effect? It's probably that.