Risky Investments in Mortgage-Backed Securities Explained

Investors are betting against the housing market despite historical stability, seeking risky payouts on mortgage bonds.

### Betting Against the Housing Market: A Risky Investment in Credit Default Swaps
* 🏠 The discussion revolves around purchasing credit default swaps on mortgage bonds, which will yield a payout if the underlying bonds fail, contingent on **millions of Americans defaulting on their mortgages**.
* 💰 Despite the historical stability of the housing market, the speaker believes that prevailing market sentiment is misguided, stating, "**If you offer us free money, we are going to take it**."
* 🤔 The speaker expresses concern about **ensuring payment in case the bank faces solvency issues** when the bonds fail, highlighting the **inherent risks of the investment**.
* 💸 Dr. Barry is taken aback by the proposal to **bet against the housing market** while simultaneously questioning the bank's ability to **pay out in the event of a bond failure**.
* 🔄 A pay-as-you-go structure is suggested, where payments would be made monthly, depending on the performance of the mortgage bonds, either **paying out if they fail** or requiring **premiums if they rise in value**.
* 📊 The conversation progresses to a commitment to **sell $5 million in credit default swaps**, with the potential to **increase that amount to $100 million**.
* 🎥 The speaker also shares a personal touch, mentioning their video projects related to **gardening and bonds**, expressing **excitement about seeing themselves on screen**.

I want to buy swaps on mortgage bonds, uh, credit default swaps that will pay off if the underlying bond fails, uh, against the housing market. Those bonds only fail if millions of Americans don't pay their mortgages. It's never happened in history. Excuse me, Dr. Barry, it seems like a

foolish investment based on the prevailing sentiment of the market. Banks in popular culture, yes, it's a foolish investment, but uh, everyone's wrong. This is Wall Street, Dr. Barry. If you offer us free money, we are going to take it. My one concern is, is that uh, when the

bonds fail, uh, I, I want to be certain of payment in case of solvency issues with your bank. I'm sorry, are you for real? You want to bet against the housing market and you're worried we won't pay you? Yes, that's right.

Dr. Barry, we could work out a pay-as-we-go structure that would pay out if the bonds fail, but it would also apply to your payments if the value of the mortgage bond goes up. You'd have to pay us monthly premiums. Is that acceptable, Dr. Barry?

Um, I have prospectuses on six mortgage-backed securities. I'm not sure, foreign, why should be fine. Yeah, we're prepared to sell you five million in credit default swaps on these mortgage bonds. We make it 100 million? Absolutely, we can make it 100 million.

I like these cups. Could I take one for my son? Yes. I have two video projects. We do gardening, we do the bonds. I'd like to, uh, but it's not bad seeing yourself up there on the big screen. It's very cool. [Music] [Applause]

Big Short - Credit Default Swaps

James Aaron Brown

Proposal to buy credit default swaps on mortgage bonds, betting against the housing market.

Acknowledges the investment's perceived foolishness but highlights Wall Street's tendency to accept free money.

Expresses concern about payment in case of bank solvency issues if the bonds fail.

Proposes a pay-as-we-go structure with premiums paid monthly, regardless of bond value fluctuations.

Discussion regarding the specifics of the mortgage-backed securities and the deal's value.

Agreement to sell $100 million in credit default swaps.

Concluding Remarks and Additional Details

Casual conversation about cups and video projects unrelated to the main transaction.