The Big Short Essay

2. (a)

The Big Short is a film adaptation of the non-fictional book of the same name by Michael Lewis. This film explores the years preceding the collapse of Lehman Brothers and the events leading up to the financial crisis of year 2008. There are three storylines running concurrently throughout the film:

Storyline 1: In year 2005, hedge fund manager Michael Burry of Scion Capital recognized an asset bubble in the U.S housing market and anticipates the collapse of the housing market in the 2nd quarter of year 2007 if interest rates rise in adjustable rate mortgages. Michael sees an opportunity to profit on this collapse by creating a credit default swap market, which would allow him to bet against market-based mortgage backed securities.

(b) One individual that was faced with a conflict of interest handled that situation by choosing personal gain over their responsibility as Portfolio manager of pooled funds to act in the best interests of his clients. At first, Michael Burry tried to convince his clients that the idea of shorting the mortgage market would result in high returns on investment. However in shorting process Michael did not disclose to clients that for every time he would short a security he would have to pay a premium at the end of each day before the security reached its short price target. So what this meant is that the clients would be losing money for everyday that the short was active. I would have handled this conflict of interest differently by disclosing all information to third parties and obtain written consent to implement the short to ensure that the shareholders had the same information that I had. By doing so, this would maintain shareholder trust and alleviate any actual or perceived conflicts of interest. Research done by D. Blackman et al has shown that Intentional self-serving choices processed automatically when a person is dealing with a conflict of interest situation. Self-serving choices tend to be more heightened when dealing with self interest choices, which was the case for Michael. Michael self interest was to prove the market wrong at what ever cost because of the research and analysis he did, and at the same time he could earn a large sum of compensation for