Analysis of The Strategies Used by The Protagonists in The Big Short

The film, titled 'The Big Short,' weaves together three distinct narratives, centered around Dr. Michael Burry of Scion Capital, Jared Vennett of Deutsche Bank, along with Mark Baum and his FrontPoint team, and Jamie Shipley and Charlie Geller of Brownfield Funds. These protagonists emerge as the "weirdos" or "outsiders" in the movie, the individuals who possessed the foresight to predict the impending economic collapse of 2007. In the film's own words, they "saw what no one else could" and "exposed the colossal deception at the core of the economy by doing something the rest of the unsuspecting masses never considered – they looked."

Throughout this essay, we will delve into how these remarkable individuals managed to outmaneuver the impending economic crisis. Everything depicted in the film in the tumultuous year of 2007 can be traced back to Lewis Ranieri's Mortgage-Backed Security (MBS). It was Ranieri's revelation that set in motion a catastrophic chain of events, culminating in what has since been dubbed 'the most severe financial crisis in recent history.' As Margot Robbie's character in the film emphasizes, mortgage bonds represented a lucrative venture for the major banks, enabling them to amass enormous profits. However, when the supply of conventional mortgages began to dwindle, these financial giants resorted to bundling increasingly risky mortgages, euphemistically labeling them as 'subprime' or 'low-quality,' all in a desperate bid to maintain their profitability. This essay will dissect the film and its various strategies in separate segments.

Dr. Michael Burry of Scion Capital (Portrayed by Christian Bale)

Dr. Burry stands out as the visionary who first identified and preempted the impending economic catastrophe. Rather than viewing the looming crisis as a harbinger of doom, he perceived it as an unprecedented opportunity for profit. Without his initial insights, Jared, Mark, Jamie, and Charlie would never have realized immense fortunes amidst the economic turmoil. Dr. Burry staunchly rejected the assertions of Alan Greenspan, who confidently claimed that 'bubbles are regional, defaults are rare,' implying that the housing market was invulnerable to a crash, given its inherent stability.

Contrary to the prevailing sentiment, Dr. Burry possessed unwavering certainty about the inevitability of an economic crisis. He maintained that there were "very specific identifiers, extremely recognizable" indicators that made the impending catastrophe glaringly evident. However, these signs eluded most individuals, including those within the banking sector, who were either too preoccupied or willfully ignorant to discern them. Undeterred by the skepticism surrounding him, Dr. Burry resolved to act on his convictions. He embarked on a quest to secure credit default swaps from willing banks, contracts that would yield substantial returns should the bonds fail. Initially, this endeavor presented a formidable challenge, as many perceived it as a "foolish investment" and ridiculed his audacity. Even Mr. Lawrence Fields (portrayed by Tracy Letts), whom he regarded as a mentor, remained incredulous and even incensed when he discovered that Dr. Burry had invested a significant portion of their company's liquidity in shorting housing bonds.

Dr. Burry devoted considerable time to meticulous research, a key component of his strategy. It was through this thorough research that he uncovered the startling fact that half of the mortgage debt was in default. He understood that these mortgage-backed securities were laden with exceedingly risky subprime adjustable-rate loans, and it was only a matter of time before the bonds deteriorated in value. Dr. Burry's dedication led him to scrutinize the top 20 selling mortgage bonds, meticulously dissecting the composition of each bond without the need for legal assistance. While most assumed these bonds were comprised of an intricate web of thousands of mortgages, he alone possessed the acumen to dissect and comprehend them independently.

Another integral facet of Dr. Michael Burry's strategy was his willingness to take substantial risks. He staked a staggering $1.3 billion, the majority of Scion Capital's liquidity, on an investment that only he fully comprehended. He paid monthly premiums, fervently believing that the mortgages would inevitably falter. Dr. Burry prepared himself for the possibility of Scion Capital's demise, all in the hope that a seismic financial event would unfold. One notable but daring move Dr. Burry made, which may have been considered unorthodox in traditional financial circles, was his decision to restrict investor withdrawals. This was a calculated move aimed at safeguarding his investors, preventing them from withdrawing their funds prematurely and undermining his anticipated gains as the economic crisis unfolded.

Jared Vennett from Deutsche Bank (Portrayed by Ryan Gosling)

Jared Vennett emerges as the second unconventional thinker who bet against the housing bonds, following Dr. Burry's lead. His initiation into this world came through a coworker named Doug, who had conversations with Randall, the individual responsible for selling $200 million worth of credit default swaps for mortgage bonds, unbeknownst to Randall, this Californian funding manager was none other than Dr. Michael Burry himself. Once Jared became privy to this information, he took it upon himself to investigate, study, and evaluate this uncharted territory.

In subsequent scenes, Jared's proactive approach becomes evident as he attempts to persuade others, notably Mark Baum and his team, to consider shorting mortgage bonds. Jared employs a Personal Selling strategy by meeting face-to-face with potential buyers, Mark and his team, and engaging in direct communication with them. His in-person interaction aims to discuss the prospects of shorting the bonds or entering into credit default swaps.

An intriguing tactic employed by Jared is the embellishment of his qualifications, a strategy often encountered in the real marketing world. During one memorable scene, he falsely presents himself as a quantitative genius with a Chinese background, claiming victory in prestigious competitions held in China, while also feigning a lack of proficiency in the English language. In reality, his accomplishments were far less impressive – he secured a second-place position in the competition, and he possessed fluency in English. This deceptive strategy mirrors common marketing practices where individuals may exaggerate or selectively present facts to create a lasting impression and ultimately secure a sale. Jared's aim was to instill unwavering confidence in his mathematical prowess among his prospective clients, leveraging the notion of his supposed quantitative expertise.

Additionally, Jared unveils the practice of Bundling in the financial industry. He reveals that when bonds become too precarious for purchase, institutions like his own, Deutsche Bank, bundle them together with other bonds that have failed to find buyers. As these bundled packages accumulate, they are rebranded as a new entity, frequently receiving AAA-ratings in the range of 92% to 93%, often without rigorous scrutiny. This phenomenon demonstrates that Bundling transcends the retail sector and is a common practice within the banking industry, albeit under the moniker of 'Collateralized Debt Obligation' (CDO).

Another persuasive strategy employed by Jared involves Emotional Storytelling. He utilizes this technique when illustrating the potential consequences of the lower-rated tranches' failure, evoking a range of emotions to captivate his audience. This emotional appeal enhances the credibility and persuasiveness of his message, fostering belief among his listeners.

Mark Baum and his team Vinny Daniel, Danny Moses, and Porter Collins from FrontPoint

Mark Baum and his team, consisting of Vinny Daniel, Danny Moses, and Porter Collins, inadvertently discover Jared Vennett's intentions through a fortuitous wrong number. Upon learning of this revelation, they embark on an investigative journey, commencing with an examination of the ABX, a financial instrument tracking the value of subprime mortgages bonds. This marks the initiation of their Field Research strategy, a method employed by FrontPoint Partners on several occasions throughout their quest for information.

Their Field Research endeavors unveil a stark reality: a significant portion of houses has been abandoned due to homeowners' inability to meet their mortgage obligations. This observation underscores the severity of the impending crisis.

FrontPoint Partners also employs the Interview strategy to glean insights from various sources. During their investigation, they engage in conversations with mortgage brokers, shedding light on the brokers' practice of profiting by selling their deals to major banks willing to pay a premium for riskier mortgages. Mark goes to great lengths, even interviewing a stripper, in a bid to uncover valuable information that may have eluded him. This strategy aligns with conventional business practices where companies may go to great lengths to accommodate client requests and secure their loyalty, fearing that competitors, such as Moody's in this instance, may swoop in to seize opportunities.

During their visit to Standard and Poor's, FrontPoint Partners conducts yet another interview, this time with Georgia. This enlightening interaction reveals that credit ratings are bestowed in exchange for fees. Georgia candidly admits that the fear of losing business to competitors like Moody's often drives them to provide the desired credit ratings. This scenario mirrors real-world business dynamics where companies cater to client demands to maintain their competitive edge.

FrontPoint Partners extends their Interview strategy to Las Vegas, where they hold meetings and discussions with individuals who possess insights into the rising mortgage delinquencies. Their interactions are not only a source of critical information but also highlight the strategic importance of gathering firsthand accounts to comprehend the complex financial landscape they are navigating.

Another notable strategy employed by FrontPoint Partners is their decision to hold onto their swaps until the eleventh hour. This calculated patience proves wise as the value of their swaps reaches its zenith, ensuring maximum returns on their investments. Mark Baum's ethical stance remains commendable, even as substantial wealth beckons. He steadfastly refuses to sell their swaps, a principled decision driven by his desire to avoid mirroring the behavior of corrupt banks and government entities. He is determined not to scapegoat immigrants and the less fortunate for the crisis's aftermath.

Jamie Shipley and Charlie Geller of Brownfield Funds (Portrayed by Finn Wittrock & John Magaro Respectively)

Jamie Shipley and Charlie Geller represent the final pair of "weirdos" who stumbled upon the impending housing bubble. Initially, their pursuit was driven primarily by the desire for personal wealth, with little awareness of the impending economic crisis. Their pivotal moment arrived during their ISDA application meeting, an event that thrust them into the world of finance and led them to Jared Vennett's pitch, strategically placed on a table in the lobby of JP Morgan Chase. At the outset, Jamie and Charlie adhered to a straightforward investment philosophy:

"People hate to think about bad things happening, so they always underestimate their likelihood."

Essentially, they believed that markets consistently undervalued options on events deemed improbable. Leveraging this insight, they managed to transform their initial investment of $110,000 into a staggering $30 million by seizing opportunities grounded in this philosophy.

Another pivotal strategy employed by this dynamic duo was their recognition of their limitations and the willingness to seek professional guidance. They enlisted the expertise of Ben, portrayed by Brad Pitt, a seasoned trader who provided them with invaluable insights and facilitated crucial connections within the industry. Their humility in acknowledging their lack of expertise and their singular ambition to accumulate wealth led them to the tutelage of a knowledgeable mentor.

Furthermore, Jamie and Charlie capitalized on networking opportunities, notably their attendance at the American Securitization Forum in Las Vegas. They actively engaged with individuals who could shed light on the intricacies of their shorted mortgages. Despite their initial lack of understanding, they were undaunted in their pursuit of knowledge, displaying the courage to approach industry experts and pose pertinent questions.

The scene where Jamie and Charlie spent time at a firing range with two individuals was a strategic move, mirroring effective practices in the marketing world. Building personal relationships outside the confines of an office setting often fosters trust and facilitates mutually beneficial collaborations. It exemplifies a strategy that transcends industries, demonstrating the power of forging connections beyond professional boundaries.

Notably, Jamie and Charlie devised a strategy that was both audacious and unprecedented – betting against the AA tranches, a move unmatched by even Dr. Burry, Jared, and Mark. This bold decision exemplified their ingenuity and willingness to explore unconventional avenues for financial gain.

Conclusion

Ultimately, each character in this financial drama achieved their desired outcomes, amassing substantial wealth. However, their journeys also imparted valuable life lessons. Dr. Burry, despite his financial success, chose to shutter his fund, reflecting on the isolation he endured as many of his former acquaintances distanced themselves from him. Mark Baum, according to his wife, experienced personal growth, becoming a more gracious and compassionate individual as a result of his experiences. Jamie and Charlie, though financially prosperous, did not find the happiness they had anticipated. Their pursuit of wealth left them unfulfilled, and their paths diverged, with Jamie continuing to manage Brownfield while Charlie departed New York in search of a different path.