3.What the Big Short\' Movie Gets Right- and Wrong-About the Financial Crisis By

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3.What the Big Short' Movie Gets Right- and Wrong-About the Financial Crisis By Greg Ip Updated Dec. 11, 2015 5:34 p.m. ET The global financial crisis has inspired hundreds of books, but only a handful of movies. It's hard to make mortgages telegenic. The Big Short" hopes to change that. Based on Michael Lewis's best-selling book by the the mortgages behind the housing bubble. same name, it tells the story of a handful of traders who made a fortune betting against Director Adam McKay is better known for making comedies. "The Other Guys," a 2010 action comedy he directed that revolves around a financial fraud, piqued his interest in finance, and led him to Mr. Lewis's books. When he landed the "The Big Short," he immersed himself in books and articles about the crisis and visited a bond-trading company "I feel there's a giant gap between the professionals and experts, and average people" when it comes to finance, he says. "Average people feel they're too dumb, or banking is boring. His movie goes a long way toward narrowing that gap. Viewers get an entertaining lesson securities are constructed and how vulnerable they were to default. But it is an incomplete picture. By dwelling so intensively on mortgage finance, "The Big in the financial engineering behind the mortgage bubble, such as how mortgage-backed Short" underplays the more complex economic forces that produced the bubble and intensified the crisis. By laying the bulk of the blame on Wall Street venality, it brushes off less nefarious but more compelling reasons why so many on and off Wall Street didn't see it coming. The movie, which opens in limited theaters Dec. 11 and more broadly on Dec. 23, begins by depicting how in the 1970s Lewis Ranieri of Salomon Brothers began packaging mortgage loans into mortgage-backed securities. The MBS was "simple and valuable, but it "mutated into a monstrosity that collapsed the world's economy," declares trader Jared Vennett, a fictionalized version of Deutsche Bank trader Greg Lippmann played by Ryan Gosling.

Explanation / Answer

Traders learned that majority of loans were 'subprime loans', loans to people with low credit score. If interest rates at which they borrowed funds were to increase,they are more likely to default than triple A ratings implied. This is so because they would not be able to afford paying loans if rates increased. Moreover,houses purchased using these funds were overvalued,eventually they would have realised it and hence would have defaulted on paying back loans.

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