CDO Manager in The Big Short?
I recently watched The Big Short and had some trouble understanding the whole CDO Manager thing.. Who was that guy? I didn't understand what they were talking about and how did Mark conclude that the world economy was going to crash after talking to the guy?
Best Answer
It's perhaps a little clearer from the film's script. These are the key phrases
MARK: Are you worried about rising default rates?
MR. CHAU: I assume no risk for these products myself.
and
MARK: Okay. This is a pool of, say, 50 million in subprime loans. How much money could be out there betting on it through these synthetic CDOs and swaps?! Right now?! Tonight?!
MR. CHAU: A billion dollars.
and
MARK: CDO A has parts of CDO B and CDO B has parts CDO A, but then both get put inside CDO C?
MR. CHAU: That one's called a CDO Squared. And then there are CDOs made up of the opposite side of the bet you made with your swaps. We call them synthetic CDOs.
So, we have a CDO Manager whose job it is to manage nearly the GDP of a small country, but who has zero interest in assessing the real risk of what he's buying (e.g. the risk that the mortgages might go into default). We learn that CDO managers around the country are betting many multiples the value of the blocks of mortgages on their continued survival and we learn that the CDOs (many of which contain garbage mortgages on the verge of default) are overlapping with each other.
The ultimate upshot of this conversation is that if one CDO fails (if even a few hundred mortgage holders default on their mortgages), it will take down the entire swap. Not only that, but the CDOs are worth billions, riding on the actions of homeowners who've been missold dodgy mortgages.
Pictures about "CDO Manager in The Big Short?"
What is a CDO big short?
A CDO moulds together assets such as bonds, car loans, credit card loans, and mortgages to sell to investors. These loans, all from different places, are then put together and sent back out into the market as new bonds. Investors in CDOs can buy into different levels of risk, ranging from low to high.How much was the CDO manager worth?
This article is an excerpt from the Shortform summary of "The Big Short" by Michael Lewis. Shortform has the world's best summaries of books you should be reading.How much did Mark Baum make in The Big Short?
Long story short, because this is a long movie; the American economy collapsed, 5 trillion dollars was lost, eight million people lost their jobs, six million lost their homes, Jared Vennett made $47 million in commissions, Mark Baum's team made $1 billion and Michael Burry made $100 million for himself and $700 ...Who is Wing Chau?
Wing Chau is an investment advisor and bond manager whose role as a CDO manager was depicted in The Big Short. Wing Chau wasn't happy with the way he came across in the book and movie. Learn why his position as a \u201cCDO manager\u201d was, and is, controversial and how he contributed to the 2008 financial crisis.The Big Short (2015) - Mark Baum (Steve Eisman) Meets a CDO Manager [HD 1080p]
More answers regarding cDO Manager in The Big Short?
Answer 2
From the real court case against Mr Chau:
The SEC has charged Chau and Harding Advisory with allowing hedge fund Magnetar Capital LLC to have undisclosed influence over the selection of collateral for Octans I.
According to the government, Magnetar played a role in the deal despite its known strategy of taking short positions on mortgage-backed securities in CDOs, including ones it was investing in, as it was in Octans I.
Basically Chau was being paid for guidence in building the CDOs, but was employed by a company doing their own short against them, a conflict of interests.
What Baum also realised was as the CDOs were repackaged they became a giant web, and once they started to fail the whole lot would go.
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Images: Marcelo Chagas, George Milton, Karolina Grabowska, Ono Kosuki