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over 8.8 million jobs were lost over 19.2 trillion dollars in household wealth evaporated S P 500 declined by 38.5 percent and over 8 million home foreclosures were recorded during the 2008 financial crisis however there was a man named Michael Berry who profited greatly during the crisis in the early 2000s he recognized significant issues arising within the U.S system shockingly these problems were left unaddressed resulting in the severe Devastation of the housing market and the American economy how did Berry accurately predict this crisis how did he bet against the American housing market and defy the odds in this video we'll uncover the answers stay tuned until the end because trust us this is worth every second let's go back to the beginning and understand the key elements of the 2008 home crash the American dream which revolves around hard work good jobs and Home Ownership played a significant role immigra grants Coming to America also embraced this dream and worked diligently to purchase a home to fulfill this dream people often turn to Banks for loans when a borrower applies for a loan at the bank the bank verifies their ability to repay it if the person is unable to repay the loan is typically rejected if they are deemed capable of repayment the bank approves the loan and earns interest this is how commercial Banks generate income by providing loans consider the situation where 20 people have borrowed money from ADC Bank to buy a house resulting in a debt owed to the bank ADC bank then decides to sell these loans to an investment bank which combines them to create mortgage-backed Securities this process known as securitization allows investment Banks to transform individual loans into tradable security these mortgage-backed Securities are then sold to investors who trust them because they are considered safe Investments the belief is that homeowners will repay their loans making these Securities reliable meanwhile Home Loans serve as the foundation of mortgage-backed Securities which are assigned ratings by agencies like Moody's ratings assigned to loans are based on the borrower's behavior known as a tranche if a borrower consistently pays premiums on time without missing any their loan is considered less risky and given a higher rating such as AAA another type of borrower May occasionally Miss premiums but eventually pays the back the loan though slightly riskier and rated lower like Triple B however a borrower who defaults on payments and cannot repay the loan receives a lower rating such as Triple C when investors consider investing in mortgage-backed Securities they rely on the overall ratings assigned by credit rating agencies to these Securities if a mortgage-backed security has a significant number of AAA rated loans it is perceived as a safer investment however a problem arose when investment Banks and credit rating agencies colluded leading to inflated ratings loans with Triple C ratings might be assigned AAA ratings deceiving investors into believing these securities were safer than they actually were this process greatly benefited Banks they would issue loans and sell them to investment Banks who would then create mortgage-backed Securities credit rating agencies would give these Securities higher ratings making them appear safe to investors however the majority of loans Within These Securities were riskier than perceived with Triple C ratings instead of Triple A to expand their borrower base Banks began offering adjustable rate mortgages let's call it arms arms have interest rates that can change over time prior to the 2008 crisis lenders enticed borrowers with initially low rates that would later increase often making payments unaffordable this attracted financially irresponsible borrowers resulting in a higher number of bad loans and more Triple C rated loans and mortgage-backed securities to attract more borrowers Banks introduced interest-only adjustable mortgage loans these loans allowed borrowers to pay only the interest portion for a set period usually the first first few years before requiring payments that include both principal and interest this type of loan became popular before the 2008 crisis as it made monthly payments more affordable during the interest only period increasing homeownership opportunities interest-only adjustable mortgage loans were risky because borrowers didn't pay down any principal during the interest only period when that period ended they often couldn't afford the higher payments that included principal and interest to attract even more borrowers Banks introduced interest-only negative amortizing adjustable rate subprime mortgages borrowers paid minimal amounts each month with the remaining premium added to the loans principal risky investors flocked to these loans resulting in Triple A ratings from credit rating agencies however mortgage-backed Securities were filled with worthless Triple C rated loans creating a ticking Time Bomb this chaos unfolded with the assumption that housing demand and prices would rise continuously coupled with low interest rates for loans when interest rates increase store where adjusted borrowers defaulted leading Banks to repossess their houses defaults became widespread flooding the market with homes and driving home prices down Banks struggled to recoup even half of the original home values the cascading effects impacted investors who bought mortgage-backed Securities resulting in financial losses meanwhile in the 1980s the US government introduced the secondary mortgage enhancement act which allowed Pension funds and insurance companies to invest in these private mortgage-backed Securities these funds were heavily invested relying on credit rating agencies positive ratings Unfortunately they suffered significant losses impacting hard-working individuals pensions amidst this chaos one person carefully observed the situation imagine being the one person who saw through the deception and predicting the impending collapse of the housing market well meet Michael Berry a man who defied conventional wisdom and made a fortune while exposing the greed of big Banks as the loans were reported to sec only Michael Berry bothered to delve into the details he uncovered the prevalence of risky interest-only adjustable rate mortgages in MBS bonds Barry's research further revealed that the housing market was a ticking Time Bomb a bubble waiting to burst between 2005 and 2004 Barry astutely foresaw the crash when interest rates on these adjustable rate mortgages would be reset in 2007.
as the manager of a hedge fund Barry's responsibility was to seek lucrative Investments for his clients meanwhile at the time there was no instrument with which you could bet against the housing market so Barry approached the investment Banks and proposed a new Financial instrument credit default swaps with credit default swaps Barry wagered that mortgage-backed Securities would fail paying monthly premiums for the swaps basically he took a short position on the housing market going against the prevailing belief that everyone would fulfill their loan obligations many considered him crazy but Barry remained steadfast in his conviction that the crash was inevitable borrowers began defaulting on their loans with a domino effect started leading to a worldwide recession as the housing market crumbled Michael Berry received all the premium amounts he paid for those credit default swaps and the value of the contracts they fixed his bets netted him a personal gain of 100 million dollars and the Staggering 700 million dollars for his investors curious to know how Barry really made this huge sum of money then watch our video on how Michael Berry really made 700 million dollars in The Big Short thanks for watching
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