Just watched the movie last night. Haven't read the book.

When the three different groups of investors sold their swaps, they were under alot of pressure to do so (I assume because they thought the financial world might end and no one could buy them if they waited too long).

My question is: How much less did they accept at sale than what the instrument was supposed to pay? They kept talking about 10 or 20 to 1 payouts. Seems like they only got 4 or 5 to 1.

Also, with how the situation actually played out, could they have actually held their swaps to collect the full amount? Seems like the guy played by Steve Carell had an idea the bailouts were coming.

1 ...

Report Post

Posted by blackoutdore

Nashville

Member since Jun 2013

247 posts

Posted on 1/4/16 at 5:42 pm to Brightside Bengal

It's been about 6 months since I read the book, but their main concern was that the companies who bet the other end of their swaps would completely fail and not have enough cash to pay their side of the bet. I think they could have held on and collected the full amount (someone with more insight into the financial industry please correct me here if I'm wrong), but a 400% to 500% return is really insane over that time period. Most people would shite rainbows if they could get 20% return annually.

In case you got lost in the movie (haven't seen it yet), I think the easiest way to imagine the whole bet would be the equivalent of me taking fire insurance out on your house knowing that your house is going to go up in flames in the next few years due to faulty electrical wiring. I simply pay a premium every month for that insurance which is a fraction of the cost of the house, and fortunately for me, when the house burns down, I don't lose my own house, whereas you have to deal with the pain and financial loss of losing your house. Now imagine that bet times 1M on every house in Louisiana at the same time, and you could imagine how I would be scared that State Farm of Louisiana wouldn't have the reserves to pay out all that money.

Hope that helps.

1 ...

Report Post

Posted by Martini

Near Athens

Member since Mar 2005

48838 posts

Posted on 1/4/16 at 10:44 pm to blackoutdore

For Cornwall Capital that was their fear. When Lehman was allowed to fail they realized how exposed they could be. But it was a feeding frenzy to buy their swaps so it was timed right. It was time to sell and get out of the trade.

Michael Berry saved a few hundred thousand dollars worth to see it they would be honored and they were much later.

They all saw it coming. Great book and I will see the movie.

And fun fact Michael Lewis grew up in New Orleans and went to Newman before Princeton.

Page 1