The video explores the events leading up to the 2008 financial crisis, particularly focusing on the housing market's collapse. It explains how subprime mortgages, bundled into mortgage-backed securities, appeared low-risk initially but were fundamentally flawed. The Federal Reserve's low interest rates after early 2000s economic incidents incentivized risky lending, which laid the groundwork for catastrophic financial fallout.

Michael Burry, an investor with keen analytical skills, foresaw the housing market's impending collapse by spotting deteriorating credit standards in subprime mortgages. Despite skepticism from peers, he invested massively against the market through credit default swaps. His contrarian investment strategy ultimately resulted in substantial profits when his predictions came true, highlighting the importance of data-driven decision-making and skepticism towards universally accepted market notions.

Main takeaways from the video:

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Key Vocabularies and Common Phrases:

1. prosperity [ˌprɑːˈspɛrɪti] - (noun) - A state of flourishing, success, and economic well-being. - Synonyms: (wealth, success, affluence)

In the early two thousands, the United States was riding a wave of prosperity.

2. credit default swap [ˈkrɛdɪt dɪˈfɔːlt swɒp] - (noun) - A financial derivative that allows an investor to "swap" or offset their credit risk with that of another investor. - Synonyms: (financial contract, derivative, security)

One of my swaps on mortgage bonds, a credit default swap that will pay off if the underlying bond fails.

3. subprime [ˌsʌbˈpraɪm] - (adjective) - Relating to credit or loan arrangements for borrowers with a poor credit history, typically having unfavorable terms in the form of high interest rates. - Synonyms: (high-risk, non-prime, marginal)

Even those who had poor or no credit history at all, were given subprime loans.

4. mortgage-backed securities [ˈmɔːɡɪdʒ bækt sɪˈkjʊrɪtiz] - (noun) - Investments that are secured by mortgages and pay returns derived from interest and principal payments on those mortgages. - Synonyms: (asset-backed security, investment, bond)

The banks would then sell them to Wall street, who in turn would package these loans into what they called low risk financial instruments, which were also known as mortgage backed securities.

5. foreclosures [fɔːrˈkloʊʒəz] - (noun) - The process by which a lender takes control of property after the borrower fails to make required mortgage payments. - Synonyms: (repossession, default, seizure)

foreclosures began to rise, the housing prices plummeted dramatically, and Wall street began to panic.

6. contrarian [kɒnˈtreəriən] - (adjective) - Going against or rejecting popular opinion or current practice. - Synonyms: (oppositional, dissenting, nonconformist)

Michael Burry's big short was a testament to the power of contrarian thinking and thorough research.

7. revamp [riːˈvæmp] - (verb) - To renovate, redo, or revise something, improving it or giving it a fresh new look. - Synonyms: (overhaul, improve, redo)

The act completely overhauled and reworked guidelines and rules surrounding the federal financial regulatory systems.

8. peculiar [pɪˈkjuːliə] - (adjective) - Strange or unusual, especially in a way that is unsettling or hard to understand. - Synonyms: (strange, unusual, odd)

One person noticed some peculiar numbers coming from the housing market.

9. ravenous [ˈrævənəs] - (adjective) - Extremely hungry; voracious; intensely eager or greedy for gratification or satisfaction. - Synonyms: (voracious, insatiable, gluttonous)

This bond, gentlemen, is aaa ravenous.

10. incentivize [ɪnˈsɛntɪvaɪz] - (verb) - To provide someone with a reason or incentive to do something. - Synonyms: (motivate, encourage, induce)

The Federal Reserve's low interest rates after early 2000s economic incidents incentivized risky lending.

"I Got Rich When I Understood This" - Michael Burry - 3 Lessons from the Big Short

In the early two thousands, the United States was riding a wave of prosperity. But beneath the surface, a financial storm was brewing. You've got your average person's mortgage, fixed rate, 30 years, boring, safe, small payoff, right? But when you have thousands of them all bundled together, suddenly the yield goes up, but the risk is still small. The good life was going to come to an end with a massive collapse that would trigger the great Recession. That left people without jobs, homes, savings, and cause complete chaos within the global lending system.

Fines were everywhere. But now it's official. We are in a recession. Nearly 2 trillion tax dollars have been shoveled into the hole that Wall street dug. This collapse within the financial world was years in the making. But no one seemed to realize how massive it would be. Out of all the people who were tapped into the financial market, one person noticed some peculiar numbers coming from the housing market, and after diving into more research, realized the collapse was coming. Despite the many people who thought he was crazy, that his guess was inaccurate and foolhardy, he went with his gut instinct and committed his fund to a massive bet against the housing market known as the big short.

One of my swaps on mortgage bonds, a credit default swap that will pay off if the underlying bond fails. You want to bet against the housing market? Because of this, he pulled off what seemed to be the impossible and won himself and his clients millions of dollars, while others were losing everything. Michael Burry, the investor behind the big short, proved that you should always trust the numbers, that no market is safe from collapse, and that even when others tell you that you're crazy, you need to go with your gut. In this video, not only will we go over the lessons we can learn from the crash, but we will also dive into how Michael Burry saw these numbers and broke it down to work in his favor.

During the early two thousands, the housing market was booming. Home ownership was on the rise, and mortgage lending was easy and lucrative. This was caused by the fact that after the.com bubble bursting, the 911 attacks, and multiple corporate accounting scandals, the Federal Reserve lowered the federal funds rate from 6.5% to a whopping 1%. This was done in hopes of boosting the economy, as well as providing every american with a chance of owning their own home. This resulted in a rise in housing prices, but low mortgage rates, which were taken full advantage of.

Even those who had poor or no credit history at all, were given subprime loans, which is considered extremely high risk to the banks or the people loaning the money. After these risky loans were given out, the banks would then sell them to Wall street, who in turn would package these loans into what they called low risk financial instruments, which were also known as mortgage backed securities and CDO's. Since this was proving to be lucrative, an entire secondary market was created.

What exactly is the credit rating on this bond? This bond, gentlemen, is aaa ravenous. This is exactly what the Michigan State pension fund has been looking for. I'll buy 20 million. Oh, come on, live a little. 25 million. This is where Michael Burry dug deep into the world of subprime mortgages, and where he saw a fundamental flaw in the system. He realized that these subprime mortgages were ticking time bombs, and that it was only a matter of time until they blew up.

I called up the prospectuses and I read the prospectuses and I looked at these pools. I could see the credit standards within these pools deteriorating just quarter to quarter. Also came to the realization that by being able to bet against these mortgages, it would be something that would make money hand over fist. Burry brought these ideas to other investors, warning them of the coming collapse. Despite the proof in the numbers, almost all the investors Burry went to thought his idea was idiotic and that there was no way that the housing market was going to crash.

Despite the numbers, many investors believed that the housing market was uncrashable and something that would always be safe to bet on. 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. A couple of other investors, including Steve Eisman and Greg Lippmann, saw the same thing that Burry saw and also committed to putting their funds against the market. As the years passed, what Burry predicted began to come true. foreclosures began to rise, the housing prices plummeted dramatically, and Wall street began to panic.

As the chaos continued and the housing market completely collapsed, the government had to step in to make sure the entirety of the financial system didn't go up in flames. Despite this help, Lehman Brothers declared bankruptcy and still holds the title of biggest bankruptcy in us history. The 2008 financial crash devastated the economy and turned the financial world on its head, leaving many broken and left to pick up the pieces.

Meanwhile, those who bet against the housing market ended up making millions in profit. What are the big things we can learn from this crash to make sure we learned our lesson? According to the Federal Reserve bank of St. Louis, there were three big lessons learned for the crash. The first was having high levels of debt, borrowers that were high risk and probably not going to pay their loans and an expectation that housing prices will constantly increase paired along with other factors is a dangerous combination that equals a sense of false security.

The second lesson learned was that risk needs to be understood at all levels of the financial system. And just because there was a use of insurance policies such as credit swaps and insurance outside of the banking system, it didn't help increase risk diversification. It actually made it worse. The last lesson is one that ended up resulting in the Dodd Frank act, an act which was implemented after the 2008 crisis. The act completely overhauled and reworked guidelines and rules surrounding the federal financial regulatory systems and a good majority of the USAs financial services industry.

The act created the Consumer Financial Protection Bureau, which was charged with protecting consumers against abuses related to credit cards, mortgages and other financial products. It also created the Financial Stability Oversight Council and the Office of Financial Research, whose jobs are to identify threats to the United States economy and financial stability at the end of the day, the 2008 crisis revealed the mess that was the financial industry and in a blessing in disguise moment allowed the industry to be rehauled, to practice caution, and taught investors and regular citizens the lesson of not putting blind faith in any market, especially one that involves finances.

The 2008 financial crisis was a harsh and cruel reminder of the dangers of trusting the market and believing something is uncrashable. Because of his bet against the housing market, Michael Burry ended up making $100 million in profit for himself and over $725 million for his investors. Michael Burry's big short was a testament to the power of contrarian thinking and thorough research. It was a critical chapter in the story of the 2008 financial crisis, a crisis that reshaped the financial landscape and left lasting lessons for investors and the world.

Finance, Economics, Global, 2008 Financial Crisis, Michael Burry, Market Collapse, Business Motiversity