Jared Vennett's Guide To Modern Mortgages Explained

In the 2015 film *The Big Short*, Jared Vennett, played by Ryan Gosling, is a Deutsche Bank trader who predicts the collapse of the US housing market. Vennett is a key character in the film, serving as both a narrator and a central figure in the story. He is based on the real-life Wall Street trader Greg Lippmann, who played a significant role in betting against the housing market in the lead-up to the 2008 financial crisis. In the film, Vennett recognises that many subprime mortgages are at risk of default and that the complex financial instruments built on these mortgages are unsound. He takes advantage of this opportunity by selling credit default swaps, betting that homeowners will default on their mortgages. This sets the stage for the broader exploration of the complex world of mortgage-backed securities and the 2008 financial crisis in *The Big Short*.

Credit default swaps

Jared Vennett, a character in the film "The Big Short", based on a real-life Wall Street trader, Greg Lippmann, recognised the impending collapse of the US housing market. Vennett's character serves as a narrator and a key player in the film, breaking the fourth wall to explain complex financial instruments to the audience. He explains how modern mortgages are private and made up of layers of tranches, with the highest-rated tranches getting paid first and the lowest-rated tranches taking on defaults first and being slightly more risky.

Vennett's opportunity to profit from the looming disaster came in the form of credit default swaps. He started selling these swaps after inadvertently discovering another character, Michael Burry's creation of them. Burry, played by Christian Bale, is portrayed as a manager of a hedge fund who begins to suspect the booming US housing market is an asset bubble inflated by high-risk loans. He creates credit default swaps as a new financial instrument that would allow him to short the housing market by selling positions based on the assumption that housing prices will drop.

Vennett agrees with Burry's analysis of the market and begins selling credit default swaps to his clients, one of whom is hedge fund manager Mark Baum. Baum recognises the risky nature of collateralised debt obligations (CDOs) and, like Burry and Vennett, concludes that the housing bubble will eventually burst, leading to the collapse of the US housing market. By purchasing credit default swaps, Vennett, Baum, and Burry are essentially betting that homeowners will default on their mortgages in large numbers, profiting from the market's downturn.

Mortgage-backed securities

In the film *The Big Short*, Jared Vennett is a Deutsche Bank trader who recognises the impending collapse of the U.S. housing market. He is a key player in the film, serving as a narrator who breaks the fourth wall to explain complex financial instruments to the audience.

In the context of the film, Vennett, along with Mark Baum and Michael Burry, hold credit default swaps (CDS) as their asset. Credit default swaps are financial derivatives that allow investors to bet against the performance of a particular asset, such as mortgage-backed securities. By purchasing CDS, they were betting that the housing market would collapse, and the value of MBS would fall.

The film explains that the financial institutions' appetite for these securities fuelled much of the rise in the real estate market, which was out of proportion to the industry's fundamentals. This is because the banks had been offering risky subprime mortgages to borrowers with poor credit histories, and these mortgages were then bundled into seemingly safe investment products. When housing prices began to fall, many homeowners defaulted on their loans, which affected the value of the mortgage-backed securities and raised concerns about the stability of the entire financial system.

Subprime mortgages

In the movie The Big Short, Jared Vennett is a Deutsche Bank trader who recognises the impending collapse of the U.S. housing market. Vennett is a crucial character in the film, serving as both a narrator and a key player. He connects various storylines and helps viewers understand the intricacies of the subprime mortgage crisis.

The complex financial instruments built on these subprime mortgages were unsound. Vennett recognised the potential for profit in shorting mortgage-backed securities. He, along with other key figures, took massive short positions against the housing market, essentially betting that homeowners would default on their mortgages in large numbers. This involved purchasing credit default swaps (CDS) from banks, which served as a financial derivative allowing them to bet against the performance of mortgage-backed securities.

As the crisis unfolded, Vennett's bets proved profitable. The collapse of the housing market and the subsequent wave of mortgage defaults triggered a domino effect, creating larger losses throughout the economy. The 2008 financial crisis exposed critical flaws in the banking system and led to significant changes in financial regulations.

Collateralized debt obligations (CDOs)

In the film *The Big Short*, Jared Vennett is a Deutsche Bank trader who recognises the impending collapse of the U.S. housing market. Vennett's character is based on Greg Lippmann, the global head of asset-backed securities (ABS) and collateralised debt obligation (CDO) trading at Deutsche Bank during the financial crisis.

The CDOs in *The Big Short* are described as "poorly structured, high-risk packages of loan securities" that received AAA ratings from credit rating agencies, implying a degree of safety they did not truly offer. These ratings were misleading, and the true risks of the investments were concealed by investment banks and credit rating agencies.

The character Mark Baum discovers that these CDOs are being repackaged and resold in questionable ways, and that the financial institutions' appetite for these securities is fuelling the rise in the real estate market out of proportion to the industry's fundamentals.

The impact of CDOs is explained in the film using a scene with actress Selena Gomez playing blackjack. As Gomez wins at blackjack, representing a rising housing market, side bets on her hand increase. However, when she loses, representing falling housing prices, the side bets trigger a domino effect of larger losses, illustrating how CDOs contributed to the nationwide economic disaster.

Synthetic CDOs

The key components of synthetic CDOs include credit default swaps, reference securities, and a structure that distributes cash flows and losses among the tranches based on the performance of the underlying credit assets. Tranches refer to the different layers or slices of securities within the CDO, each representing a portion of the portfolio of credit default swaps. These tranches offer varying levels of risk and return, allowing investors to select the level of credit risk they are comfortable with. The senior tranche, for example, includes securities with high credit ratings and tends to be low risk, while the equity tranche carries a higher degree of risk and offers higher returns.

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