Question

Which group was the most at fault for the housing market bubble collapse--homeowners (particularly subprime mortgage borrowers), big investment banks, ratings agencies, insurance companies, or the new crop of hedge fund managers who embraced "shorting" as a way to profit from the current market trends? Use examples from the book Big Short to explain why.

Answer 1

A huge rise in housing prices due to increased demand and speculation is known as housing market bubble. When there is increased supply in relation to short demand for a period of time, speculators invest their money in the market which increases the demand even further and leads to hike in prices.

At some later date. when supply increases, these speculators withdraw their money from the market and earn huge profit due to which the bubble collapse. This whole situation is termed as Housing market bubble collapse.

The group that was most at fault for the Housing market bubble is the new crop of hedge fund manager who embraced shorting as a way to profit from current market trends.

When housing Interest rates lowers, the individuals who could not afford houses runs towards buying houses which led to huge rise in demand. The investment by Hedge Fund managers further increased the demand and hiked the prices. This created a housing bubble which collapsed when interest rates are increased and these hedge fund managers removed their money from the market.

In the book Big-short, Michael Burry, manager of scion capital realises that the US market is at bubble and began to create credit default swap that allowed him to short the housing market. Hedge fund manager Mark baum also joins Michael burry in investing in CDS.

Finally, Charlie Geller and Jamie Shipley– seek the investment advice of retired banker Ben Rickert after they discover a paper written by Vennett. After Shipley and Geller made a series of successful bets against the housing market, Rickert grew angry that they have profited off the downfall of the U.S. economy and Middle America’s financial doom. Geller was based on Cornwell Capital founder Charlie Ledley, while Jamie Shipley was based on Cornwell partner Jamie Mai. Rickert was based on Ben Hockett, a former trader at Deutsche Bank. They earned a fortune for their trade bug huge losses were incurred by others