Well I do and I don’t ..
The Big Short is a 2015 film based on the Micheal Lewis book about the financial collapse in 2008 and about a few select people who made a large amount of money from it
What I do understand is that people were sold mortgages that they could not afford. Described as sub prime mortgages. Many banks bought these debts packages as collateralized debt obligations (CDO). When the people who took out the mortgages defaulted the banks lost money a lot of money.
The film has helpful celebrity cameos explaining some things about the market at the time e.g.
Margot Robbie in a bubble bath states direct to camera “When you think sub-prime, think shit.”
This is where it gets hazy. These banks insured some of the debt for which they paid premiums in case of default but presumably not all. Where it really is interesting is that Michael Burry a hedge fund manager convinced them (the banks) to sell him Credit default swops (CDS) for which he paid premiums. If the borrowers defaulted he would make a lot of money, if he didn’t he only lost his premiums.
This is alluded to by Selma Gomez in a casino talking about “side bets”
Berry was shorting on a housing market collapse. While shorting existed on stocks it did not for the CDO’s CDS for these were a new product that he convinced the banks to sell him. But why? Yes the banks were hedging their bets but what did they think they would gain. Burrys premiums were low the profits on a collapse enormous (for him). Yes the banks thought it so unlikely an event they may have considered his premiums free money. Of course in the unregulated market as it was everyone was betting but still remarkable stuff.
I have seen it best described as Burry was taking out life insurance on somebody else dying or house insurance on somebody else’s house being burgled. When the collapse did happen he made a $100 million dollars.
