The Big Short, the Mortgage Crisis and What To Do With Your Investments

Mey here writing a blog tonight on the movie I just watched called The Big Short and am blogging about The Big Short, the Mortgage Crisis and What To Do With Your Investments…

…the trailer for the movie is playing now and I highly recommend watching it, it’s not only informative, it’s actually pretty funny and moving too…

…and in the movie, they basically talk about people who bet against the housing market in 2005, before the crisis hit in 2007…

…the movie is funny, and scary and taught me some basic things that you MUST do if you want to invest wisely in the market…

…so read this blog post to the end and decide for yourself what you need to do to keep your investments safe…

Know What You Are Investing In

…this is usually for your fund manager to do, and in the movie, the fund manager of Scion asks a new employee to look into all the top AAA rated mortgage bond funds and tell him all of the mortgages that are in each of them…

…then when he got the data, he found out that most of the bonds were made up of a large portion of mortgages that were already late on their mortgage payments, or were adjustable rate mortgages that were going to have a huge rate hike in 2007…

…in other words, he took the fund and actually looked inside of it…

…and when he found out that it was made up of mortgages that were already going delinquent, and the rest would probably go delinquent in 2007 when their mortgage rates went up and people would not be able to afford their mortgage payments…

…now how this could happen?

…greed…

…the big banks that packaged the bonds were getting great returns selling them and as long as people bought them they didn’t care…

…it’s like if you know the apples you were selling were poisonous, and you just kept selling them because people did not know and kept buying them anyways…

…so, if you want to avoid huge losses in your portfolio, first step is to take a look inside of it and see what is in it…

Ratings Are Not An Indicator of A Funds Strength

…in the movie, the greatest tension for the investors who bet against the mortgage funds was that the ratings would not go down, even when the mortgage crisis was happening…

…two fund managers actually visited Standard Poor’s to see why they were still rating the bonds AAA when the mortgages in them were failing…

…and the representative told them that if they didn’t rate the bonds at AAA, the banks would go to their competitor…

…so, the banks did not allow the rating to change until they sold all of the failing bonds at the highest price possible…

…after they were sold and no longer at risk, they allow the rating agencies to downgrade the bonds…

…so, the moral of the story is, don’t trust the ratings…

…rate your bond yourself by looking inside it…

We Are All Responsible for The Economy’s Health And Our Own Investments

…I really liked the movie because it wasn’t a black and white “the banks are wrong and we are right” kind of movie…

…the main characters were in the movie making money off of the fact that they shorted mortgage bonds, meaning that they saw that they were bad and they bet against them…

…and then they had to work fast after to sell them before the banks collapsed and would be unable to honor their contracts…

…in other words, they capitalized on the bonds as well, and if the bonds didn’t exist, they wouldn’t have made all of the money that they did make…

…and that’s represented best by fund manager Matt Baum, who was extremely righteous at the beginning of the movie, and then became more humble when it was over, realizing that he also had capitalized out of the misery of so many Americans who lost their homes, retirement and pension funds…

…think about it this way, if someone applies for a mortgage and they don’t read the contract and figure out what they will be paying when their rate goes up is setting themselves up for forelosure…

…of course, there are banks that did not disclose this important rate change information and those banks have been heavily fined by regulatory agencies after the fact…

…however, a lot of people who bought homes, did it without a down payment, and just assumed they could refinance before the rate went up, without actually investigating on whether that would be true…

…even my husband was paying interest only payments on his mortgage and second mortgage…

…the whole structure of it was risky and so each and every person entering into the mortgage also has the responsibility to understand the risks…

…after all, there are no guarantees that housing prices will always go up, as we saw in the housing crisis and market crash of 2008…

…the moral of the story – if we make risky investments without any research or actual facts about our investment, and trust the words of an investment advisor who probably never looked inside of the funds themselves, then we are the fool being let by the fool…

…it is our responsibility to know what we are investing in, whether that is buying a house or investing in stock or fund or business opportunity…

Conclusion

…I thought the movie was very thought provoking, and I see why so many famous actors agreed to be in it…

…it’s very funny, compelling and taught me a lot about the market…

…I know a lot of people who lost a lot of money in the mortgage crisis…

…most of them are my age and it’s interesting to see how they adapted…

…they were millionaires, and now they are still millionaires…

…and you know what they are doing?

…they’re selling educational courses and blogging platforms to help people make money on their own terms…

…now their results aren’t typical, see full income disclaimer here…

…and the thing I like about them is that they are highly ethical…

…selling products that actually help people learn to make their own money on the internet…

…they take full responsibility for their own money…

…no longer going through banks and mortgages…

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