Amélie Sicart de Taqui – MBF1 (2018-2019)

WEEK 1 – INTRODUCTION
Joseph Stiglitz is a Keynesian economist.

Neoliberalism1 is a policy model of social studies and economics which is cons any form of state inter-
vention (no "big government"). It suggests that governments must limit subsidies, reduce deficit spend-
ing, limit protectionism, open markets up to trade, abolish fixed exchange rates, back deregulation, per-
mit private property and privatize businesses run by the state. This current tends to be to the right (=
conservative) of the political spectrum. For instance, the Tea party could be fits in this stream of thought.

Liberalism is a policy model of social studies and economics which believes in redistribution, in social
progress. Social issues are at the heart of this stream of thought. This current tends to be to the left of
the political spectrum. Former US President Barack Obama is a liberal politician.

Democracy, gender inequalities, secular schools, secular society. Liberal ideas. Believes in social equal-
ities.

The subprime crisis highlighted the Wall Street v. Main Street conflict. More generally, this expression
brings to light the opposition between two groups:

- "Wall Street" includes banks, stock exchanges, insurance companies, headquarters, big corpora-
tions, traders and senior executives. It seems to represent power and money. The knowledges
could be the source of their power;
- "Main Street" refers to the average Americans.

Some people have the feeling that citizens (who are regarded here as the victims) have been attacked by
the banking system (which could be compared to the aggressor). Bankers made profits on people’s ig-
norance and naivety.

The Charging Bull (1989, Arturo Di Modica) is a striking image (or meta-
phor) of Wall Street. Indeed, the bull is an aggressive, strong and impressive
animal which can also attack without thinking. Hence, it gives the feeling
that, the financial system is imposing and fearless but it can also act without
thinking (people in it just follow the crowd movement, the trend).

It is the symbol of aggressive financial optimism and prosperity. The bull is

leaning back on its haunches and with its head lowered as if ready to charge.2

In a bull market, investors anticipate a rise in prices contrary to a bear market in which they expect
prices to fall.

A stock (or a share) is a part of the equity of a firm. In turn, it gives to owner dividend. It is traded on
the equity market.

• The Big Short: from the book to the movie

The Big Short: Inside the Doomsday Machine (written by Michael Lewis) is a non-fiction book about
the housing bubble that led to the subprime crisis. It was published in 2010 before being adapted (by
Adam McKay) for the screen in 2015.

1 https://www.investopedia.com/terms/n/neoliberalism.asp
2
https://en.wikipedia.org/wiki/Charging_Bull

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Wall Street is an attractive topic (money, wealth, sex) that why there are so many movies about this
subject. It is especially its negative aspects that provides compelling movie material with a clear enter-
tainment value.

The movie The Big Short mirrored much more a conflict between two parts among the financial system
than the Wall Street versus Main Street conflict. It is focused on the bond market.

The movie won the Academy Award for Best Adapted Screenplay.

The register is casual.

At the beginning of the movie The Big Short, we can hear the sound of a ticking time bomb, which is
very stressful. It contributes to create a feeling that we are going to the front of a disaster. Indeed, the
housing market is on the bring to collapse: we can see for instance Kapla constructions collapse or the
World Trade Center.

A shot of the Wall Street Charging Bull statue is glimpsed briefly in the montage.

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VOCABULARY
ENGLISH FRANÇAIS
(To) collapse S’effondrer – un effondrement
Credits Des crédits
Defraud Frauder
Director Un réalisateur
Directorial choice
Equity Capitaux propres
Fraud Une fraude, une escroquerie
Knock-on effects Les répercussions
Mortgage Une hypothèque
Wall Street v. Main Street conflict “La rue vs. Le monde de la finance”
Plot Un complot
Scam Une arnaque
Screenplay Un scénario
Screenwriter Un scénariste
Securitization La titrisation
Securitized mortgages Des hypothèques titrisés
A shot Une image
A staple Un morceau, une agrafe, un produit de base
Trailer Une bande annonce
The wheelings and the dealings Les magouillages (les manigances)
Pace La cadence, le rythme
Casual Décontracté
A ticking time bomb Une bombe à retardement
To be on the bring Être sur le point de
To be on the point Être sur le point de
A levee breaks Un barrage
The trading floor La salle de marché
To defraud Frauder
A time bomb Une bombe à retardement
To glimpse Apparaître

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WEEK 2 – SECURITIZATION

• Deregulation of the financial system

Throughout the 1980s and the 1990s, financial markets were gradually deregulated.

In 1999, the Gramm-Leach Bliley Act (under Bill Clinton) partly dismantled the Glass Steagall Act
(1933) which was at the origin of the classic US distinction between commercial and investment banks.
In some way, it promoted the creation of universal banks (which provide both commercial and invest-
ment services).

In 2000, the Commodity Futures Modernization Act (under Bill Clinton) reinforced the regulation of
OTC markets on which are traded derivatives such as futures.

In 2004, the SEC Net Capital Rule (under George Bush junior) allowed investment banks (with more
than 5 billions dollars of assets) to use their own risk model in order to manage their risks. Hence, it
allowed broker-dealers (which are companies trading securities for clients called (i.e., brokers) and for
their own account (i.e., dealers)) to greatly increase their leverage. As a result, the debt-capital ratio
went from 12 to 30 between 2004 and 2007 according to Joseph Stiglitz.

• Securitization and the mortgage bond market

Securitization is the process through which an investment bank creates a financial instrument by com-
bining other financial assets and then marketing different tiers of the repackaged instruments to inves-
tors. It diversifies investment portfolios and shares risks. It makes easier investment by offering new
types of financial instruments. Globalization contributed to extend this process to the world.

Since the 1990s, securitization has been gradually extending to a new type of asset: homes, which led
to the creation of the mortgage bond1 market.

This latter continued to growth thanks to several events. Indeed, at the beginning of the 2000s, the
bursting of the dot-com bubble and the insufficient returns of most bonds (because they were paying
very low rates) forced investors to find more profitable way to invest their equities. At the same time,
more and more prospective homebuyers were looking for mortgages at favourable rates.

Initially, the mortgage bond market attracted few investors. Indeed, mortgage bonds were regarded as a
claim on the cash flows from a pool of individual home mortgages. These cash flows were always prob-
lematic because borrowers could pay off any time they pleased (basically, when the interest rates were
low).

Thus, at first, investors were reluctant due to the uncertainty about the term of their investments in home
loans, even if it offered more attractive rate of return than many types of bonds. Indeed, mortgages pay
generally higher interest rates than other types of loans.

However, the origination of new type of securitized mortgages (MBS) allowed the meeting of both in-
vestor and homebuyer interests. As a result, Wall Street turned to be the place of the debts of ordinary
Americans.

• MBS (Mortgage-Backed Securities)

1
A bond is a part of a debt which provides the owner with interest (coupon). It is traded on the fixed income market.

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Lewis Ranieri (born in 1947) is a former bond trader, founding partner and current chair-
man of Ranieri Partners, a real estate firm. He is regarded as the MBS founding father.
He created it during the 1970s. At the time, he was working for Salomon Brothers (an
investment bank).

A MBS is a financial product, a security composed of a bundle of many home mortgages issued by
independent banks.

The process is this. Retail banks create the mortgages. Then, investment banks use SPV2 (Special Pur-
pose Vehicles) in order to repackage mortgages into one large bundle. Afterward, this pool of home
loans is divided into tranches based on each individual mortgage’s inherent risk and default:

- The senior tranche (the highest and so the safest → AAA-rated): the first to be paid in the event
of mortgage default, so it paid a lowest return;
- The mezzanine tranche;
- The junior tranche;
- The equity tranche (the lowest and so, the riskiest → unrated): the last to be paid but paid a higher
return.

Then, those tiers are converted mortgages into new securities. Those latter could also combine multiple
bundles of mortgages.

Eventually, the MBSs are sold by investment banks to financial investors (including pension funds)
from all around the world. MBSs provide the owner a share of the mortgage interest payments. In ex-
change, investor (rather than banks) take on the default risk from the individual mortgages that make up
the MBS.

• Critics

With regards to the US subprime crisis, Joseph Stiglitz emphasizes that diversification worked imper-
fectly. For instance, mortgages from disparate geographic regions could experience problems at the
same time, especially in the event of an increase in interest rates. In addition, securitization creates
information asymmetries. Indeed, sellers took advantage of the ignorance of potential buyers to pass on
them MBSs they knew toxic without preventing them from (or explaining to them clearly) inertial risks
of these products. Sellers did not pay attention to MBSs’ inherent risk because they know that they will
not have to bear the consequences of their mistakes.

• The Big Short

Quote forming the preamble to the book: “The most difficult subjects can be explained to the most slow-
witted man if he has not formed any idea of them already; but the simplest thing cannot be made clear
to the most intelligent man if he is firmly persuaded that he knows already, without a shadow of doubt,
what is laid before him” (Leo Tolstoy, 1897).

Quote from the opening scene of the movie: “It ain’t what you don’t know that gets you into trouble. It
is what you know for sure, that just ain’t so” (Mark Twain).

2
A SPV is a "bankruptcy-remote entity" (a subsidiary firm) that a parent company uses to isolate or securitize assets. It often
holds these off-balance sheet. Its operations are limited to the acquisition and financing of specific assets.

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The character narrating the opening scene breaks the fourth wall and addresses the viewer directly. He
uses informal and slang language (such as “snooze”). It is a way to bring audience's attention and to set
up a special link between the public and him. The aim is not to address to specialists but to make the
public comfortable. The use of casual language creates a link of trust but the information delivered is
still relevant.

The excerpt from the movie is mainly focused on Lewis Ranieri (portrayed by Rudy
Eisenzopf), who is the MBS originator. He explains to his partners the concept of
MBS. The idea is this. When you bundle thousands of mortgages, the yield goes up
but the risk remains small because homeowners usually payback their mortgages.
Hence, MBSs could be guaranteed by a AAA-rated (implying that they are safe secu-
rities pension funds).

Thanks to the MBSs, the bond department was no longer boring. Bankers “moved from the country club
to strip club” in which they were flaunting their money.

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VOCABULARY
ENGLISH FRANÇAIS
An asset Un actif
To bear the consequences of a mistake Supporter les conséquences d'une erreur
A bond Une obligation
A borrower Un emprunteur
To break the fourth wall Briser le quatrième mur (au ciné)
A bundle Un paquet (un groupe)
To bundle together Regrouper ensemble
A cameo Un camée
Creditworthy Solvable
The default risk Le risque de défaut
A fool Un fou (un imbécile)
To foreclose Exclure (écarter)
To go bankrupt Faire faillite
A homebuyer Un acheteur de maison
To lend money Prêter de l'argent
A liability Un passif (dans un bilan)
A mortgage Une hypothèque
A pension fund Un fonds de pension
To repackage Reconditionner
A screening Une projection
A script Un script
Securitization La titrisation
To securitize Titriser
A share Une action
To short Vendre
Solvent Solvant
Fashionable À la mode, chic
To issue Délivrer (émettre)
To default Faire défaut
To extend credit Octroyer un crédit
To foreclose credit Verrouiller (évincer) le crédit
Lightly Légèrement
To be bundled Être groupé (empaqueté)
An investor Un investisseur
To invest Investir
A community bank Une banque locale
To lent Prêter
To shut down Fermer
To meet a mortgage Honorer une hypothèque
To bankrupt Mettre en faillite, faire faillite
Throughout Tout au long (dans tout)
Information asymmetries Les asymétries d’information
The originator L’iniateur, l’auteur, l’expéditeur
The long run Le long terme
An incentive Une motivation (une incitation)
A credit assessment Une évaluation du crédit
Special investment vehicles off their balance shuts Des véhicules d’investissement spéciaux hors bilan
To pass on Transmettre
To ensure Assurer (garantir)
The greater fool theory The théorie folle
To open-up Ouvrir (épanouir, frayer)
a nonrecourse mortgage Une hypothèse sans recours
To snap up Se jeter sur quelque chose (capturer)
Abroad À l’étranger

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A treasury bond Un bon du Trésor

On account of En raison de (à cause de)
The bursting L’éclatement
Accustomed to Habitué à
The returns (= the yield) Une rentrée d’argent (un rendement)
Therefore Donc (par conséquent)
To provide Fournir (distribuer)
To make up Composer (constituer)
Tiers Un niveau
In the event of En cas de
Hence Par conséquent (d’où)
Proficient Expérimenté (compétent)
The risk-return balance Le rapport risque-rendement
A housing loan Un prêt immobilier
To be sold for a fee to investors Être vendu moyennant des frais pour les investisseurs
To repay Rembourser
Less creditworthy Moins solvable
A fixed term Une durée déterminée
A claim on the cash flows Une réclamation sur les flux de trésorerie
To pay off Régler une dette
Reluctant Réticent
Cheaply Bon marché
To last Durer
To come up with Trouver quelque chose, avoir une idée
Clever Habile, intelligent
To carve up Découper
A flood Une inondation
To get hit Se faire frapper
The prepayment Un paiement anticipé
Mind-bogglingly Ahurissant
A liability Une responsabilité
In short order En peu de temps
A due Un droit (une cotisation)
To hock Dénicher
An untapped asset Un actif inexploité
An investor bullish
An investor bearish
A tenure Un mandat
A retail bank Une banque de détail, une banque de réseau
Leverage L’endettement
To flaunt their money Faire étalage de leur richesse
The greed La cupidité
Greedy Gourmand
Barely À peine (faire à peine attention à …)
To snooze (! informal language !) Faire la sieste
Slang language L’argot
To crash down S’effondrer
To go up Augmenter

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WEEK 3 – CDO AND CDS

Michael Burry (born in 1971) is a physician, investor, and hedge fund man-
ager. He lost one of his hands during an operation. He was rejected by other
kids. He was member of team sport. He is awkward and anti-social. He self-
diagnosed with Asperger's disease.

He studied economics and pre-med at the University of California. He

started but did not finish his residency in neurology at Stanford Hospital.
During the night, he worked on value investing. His father died from a mis-
diagnosis. In return, his family received some compensations. In 2000, Mi-
chael Burry used this “inheritance” to create Scion Capital, a hedge fund (now defunct).

In 2005, he started to investigate the Californian bond market because he wanted to understand why so
many people extended their credit lines to borrowers with a high default risk. His analysis of mortgage
lending practices allowed him to predict the collapse of the housing market. Indeed, he understood that
subprime mortgages, especially those with "teaser" rates, and the bonds based on these mortgages,
would gradually loose value when the initial rates were replaced by much higher rates. He noticed that
prices have been steadily increasing since 2001. This conclusion led him to short this market by per-
suading investment firms (such as Goldman Sachs) to sell him CDS against subprime deals he saw as
vulnerable. It means that he caught his opportunity and decided to bet against subprime mortgage bonds.
From the busting of the housing bubble, he earned $100 million and more than $700 millions for his
investors.

A teaser rate is an introductory rate charged on a credit product. For instance, credits cards may charge
borrowers an introductory rate of 0%. Adjustable rate mortgages (ARMs) are also known for charging
a low initial rate that makes ARMs cheaper and so more interesting than traditional mortgages.

The creation of the bond market led to a huge drop in lending standards. It was now possible for low
income borrowers to access “interest-only negative-amortizing adjustable-rate subprime mortgages”.
Homebuyers could choose to reimburse nothing at all. Interest payments could be transferred to the
higher principal balance. This allowed people with no income to buy houses.

The banks wanted to extend this type of risky loan because it was a way to:

- To develop new activities with prospective high returns;

- To transfer some of their abilities (to extend credit lines or the management of credits and risks
for instance) to other companies and institutions;
- To share default risk to not bear the consequences of their mistakes;
- To improve their balance sheets.

A CDO (Collateralized Debt Obligation) is a structured financial product that pools together cash flow-
generating assets (including MBS). Then, this large bundle is repackaged into discrete tiers which vary
substantially in their risk profiles:

- The senior tranches are usually safer because they have first priority on payback from the collat-
eral in case of default. Hence, they provide a higher credit rating and offer lower coupon rates;
- The junior tranches offer higher coupon rates to offset their higher default risk.

Thus, it is a bundle of bundles mortgages.

Hedging is a risk management strategy used in limiting or offsetting probability of loss from asset price
volatility. It is a transfer of risk. It is also used in protecting one's capital against effects of inflation

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through investing in high-yield financial instruments (bonds, notes, shares), real estate, or precious met-
als. Hedging does not necessarily imply to take out insurance policies.

A CDS (Credit Default Swap) is a specific form of swap designed to transfer the credit exposure of fixed
income products between different parties. The buyer of the CDS pays fees to the seller up until the term
of the contract. In return, the seller agrees to cover losses in case of a credit event. To sum up, it is an
insurance policy against defaults related to MBSs and CDOs. They are traded on OTC markets (hence,
they are unregulated);

When an investor buys a CDS without owning the underlying asset (the debt or the mortgage) that it
insures, it is known as a naked CDS. It is only used to speculate instead of hedging. Indeed, people are
actually betting on the fact that an economic agent is going to default. They were massively used by
Goldman Sachs (against Greece). It could impact the real economy by raising the risk-free rate or sharing
risks. In 2011, the European Parliament decided to ban naked CDSs on European government debt.

• The Big Short

The character of Michael Burry is portrayed by Christian Bale.

The director chose to use Margot Robbie in a celebrity

cameo to explain MBSs because it’s an entertainment value
which can bring the audience’s attention. She could make
more accessible and easier the comprehension of complex
financial terms. Indeed, Wall Street loves using confusing
terms to make people think that only financial specialists can
understand and do what they are talking about.

Margot Robbie invites people to enter a very intimate space (a bathroom) so that viewers will trust and
believe her. She uses a familiar and spoken language (for instance, she swears “shit”, “fuck off”) that
reinforces the idea of intimacy with the audience.

The champagne and the bubble bath could mirror the growing speculative bubble.

MBS were source of great returns for the investment banks which raked billions on their 2% fee they
got for selling each of these bonds. However, then, they started running out of mortgages to put in MBS
because of the limited number of houses and people able to purchase them. As a result, banks started
filling them with riskier mortgages (the subprime mortgages) in order to remain them profitable. That
is how Michael Burry figured out that these MBS that were supposedly 65% AAA, were actually well
below to that. Hence, he decided to bet against those bonds.

The first part of the title “The Big Short” refers to short positions regarding CDSs and CDOs. The second
part of the title “A Doomsday Machine” suggests that the subprimes crisis has the potential to destroy
the financial system but also virtually all the economy.

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VOCABULARY
ENGLISH FRANÇAIS
An adjustable rate Un taux d’intérêt ajustable
To be awarded (a prize) Être récompensé d’un prix
A (celebrity) cameo Une brève apparition de célébrité
To churn Faire tourner
Collateralized Debt Obligation CDO
Credit Default Swap CDS
Doomsday L’apocalypse (adverbe : jusqu’à la fin des temps)
A fee Une taxe – des frais – des commissions
A guest speaker Un conférencier invité
Hedging Une opération de couverture
To hedge Se couvrir
A hedge Une couverture (une haie)
A home buyer Un acheteur de maison
Lending standards Les normes de prêt
A Nobel Prize winner Un lauréat du prix Nobel
To package Emballer (regrouper)
A panel Un panneau (une tribune, table ronde dans un débat)
The principal balance Le solde du principal (du capital)
To short Vendre
To have a short position Être vendeur
A subprime mortgage Un prêt hypothécaire à risque
AAA-rated Noté AAA
To be up to Être à la hauteur de (quelqu’un/quelque chose)
To show restraint Faire preuve de retenu
To watch out Surveiller, prêter attention
To owe to Devoir quelque chose à quelqu’un
To afford Se permettre
Tedious Fastidieux
Even though Même si
To draft Rédiger
Mind-numbingly Extrêmement abrutissant, engourdi
To chitchat Bavarder
To sell short Vendre à découvert
To hand Donner, remettre
To coin Inventer ou frapper une monnaie
Insurance policy Une police d’assurance
To swear Jurer
To bet Parier
To gamble « Boursiquoter » (jouer)
A gamble Un pari
Prospective Éventuel, possible
Impending Imminent
To forecast Prévoir
To short the market Court-circuiter le marché
To run out Manquer de, épuiser
To find out Découvrir
An inheritance Un héritage
To catch an opportunity Saisir une opportunité

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WEEK 4 – SHORT SELLING

According to Joseph Stiglitz, mortgage origination was fee-driven. Indeed, the issue of mortgage was
always more and more expansive for the borrowers but not for the originators and the investors.

Michael Burry chose the mortgage bonds he wanted to bet against by “looking for the dodgiest pools of
mortgage”. For that, he read numerous prospectus and financial statements about Californian real estate
market (especially about the lending practices) in order to find loopholes and make profits on them.

The value of Michael Burry’s initial short position with Deutsch Bank in May 2005 was $60 million in
CDS ($10 million in each) comparing to $750 million in July 2005. His final position was $1.3 billion.

Goldman Sachs’ strategy:

Premium 1 > Premium 2

Premium 1 Premium 2
Protection buyer Protection seller
= Goldman Sachs =
Risk seller Risk buyer
Hedge Hedge

• The Big Short

Goldman Sachs' bankers were surprised and shocked by his

proposal because they were convinced that there was virtu-
ally no risk on the reference securities. Indeed, according to
them, those underlying bonds only fail if millions of Ameri-
can borrowers don't repay their mortgages. However, it has
never happened before. Hence their use of a condescending
register. They treated him like a dumb. Their offers a “pay-
as-we-go” structure that will pay out if the bonds fail but it
would also apply to work payments if the value of the bond
goes up. They first proposed to short him for $50 million in CDS but Michael Burry requested $100
million (showing that he was really confident about his position).

Then, we can hear hip-hop music which suggests that money is presented as a business but also as a
distraction. There is the idea of easy money (more and more money was invested). Every bank he visited
automatically drew the contract. Those banks did not really pay attention to prospectus that underlined
the housing market was on the verge of collapse.

The character Jared Vennett is interpreted by Ryan Gosling. He was the first
banker who indicated that perhaps Michael Burry had a genius idea.

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VOCABULARY
ENGLISH FRANÇAIS
Socially awkward Mal-à-l'aise en société (socialement maladroit)
A bubble Une bulle
To burst Éclater
Dodgy Épineux (louche)
Fee-driven Payant (des frais axés sur)
To hound Traquer (talonner, harceler)
An incentive Une incitation (une motivation)
An issuance Une émission (d’obligation par exemple)
To issue Émettre
Leverage L’effet levier
To misdiagnose Mal diagnostiquer
Origination of mortgages La provenance des hypothèques
Outrageous Scandaleux
To pester Pester (harceler)
A pool of mortgages Un pool d'hypothèques
To pool assets Mettre en commun (mutualiser, regrouper) des actifs
A portfolio Un portefeuille
A reference security Un titre de référence
A security Un titre
Shrewd Astucieux (habile, perspicace)
A solvency issue Un problème de solvabilité
To take a cut Prendre une coupe
The underlying asset L'actif sous-jacent
Value investing Valeur d'investissement
A warning sign Un signe d'avertissement (un signal d’alerte)
To settle Régler
A prepayment penalty Une pénalité de remboursement anticipé
Likelihood La vraisemblance, la probabilité
Shenanigans Des manigances
Awry De travers, courbé
The reward La récompense
To jump into it Se jeter dedans
To catch on Attraper, comprendre, devenir populaire
To vanish Disparaître
A dumb Un idiot
The fringe benefits Les avantages marginaux/sociaux
To place Placer
An insane amount Un montant fou/insensé
A digit Un chiffre
To brag about Se vanter de
A new-fangled strategy Une stratégie inédite (dernier cri)
To handpick Trier sur le volet
A zero-sum game Un jeu à somme nulle
The dodgiest = the riskiest Le plus risqué
To be confident Etre confiant
To reach Conclure
To rush Se ruer
A pay-as-we-go structure Une structure de paiement par répartition
To draw a contract Établir un contrat

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WEEK 5 – GREG LIPPMANN AKA JARED VENNETT

According to Michael Lewis, the stock market differs from the bond market regarding its organization:
it is a regulated market, “politicized”, a heavily legislated, transparency is the rule. Financial authorities
prevent people from a miss used of market and information.

The bond market dwarfed the stock market. The valuation of the stock market is $76 trillion and the
valuation of the bond market is $100 trillion (including $40 trillion in the US bond market).

Steven Eisman (born 1962) is a businessman and investor known for having
bet against CDOs, thereby profiting from the collapse of the US real estate
bubble in 2007. At the time, he was working for FrontPoint Partners LLC,
which worked under the umbrella of Morgan Stanley.

In the movie adaptation of Lewis' book, Eisman's name was changed to

Mark Baum, and was portrayed by actor Steve Carell.

Greg Lippmann (born in 1969) is a hedge fund manager and a trader. Until
2010, he worked for Deutsche Bank, as global head of ABSs trading. At
Deutsche Bank, by finding out some loopholes in the subprime market as
early as 2006, he helped his bank to develop the strategy (based on the use
of synthetic CDO) that was used by investors to bet against this market. In
February 2010, he co-founded LibreMax Partners and is now its Chief In-
vestment Officer (CIO) and Portfolio Manager. He was dubbed “Chicken
Little” and “Bubble boy”.

In the movie adaptation of Lewis' book, Lippmann's name was changed to

Jared Vennett, and was portrayed by actor Ryan Gosling.

Eugene Xu was an analyst employed by Deutsche Bank. He was part of Lippmann's quantitative support
team. Hence, he was responsible for every piece of hard data in Lippmann’s presentation. Greg Lipp-
mann claimed that Xu won a national math competition in China (actually, the latter disclosed that he
only finished second in this competition). The fact that he was supposedly a reputed "quant" and, more-
over, a Chinese who did not speak English (in fact, he was American and spoke English), gave credibil-
ity to Lippmann's remarks (he was “sure of the math”) and made Xu seem “more authentic”. It could
explain why he was so self-confident.

He used Xu to hide important information by giving people too much information (including useless
ones). Indeed, people were lost and did not know what information was relevant or not. Eventually, if a
problem occurred, he could say that he was not his fault but that of his quantitative analyst and his
flawed analyzes. In the movie adaptation of Lewis' book, Xu's name was changed to Ted Jiang.

Page n°1
 Amélie Sicart de Taqui – MBF1 (2018-2019)

Greg Lippmann wanted Steven Eisman to short bonds that his own bank, Deutsche Bank, was creating
because it would lead to lower prices and, at the same time, higher interest rates (it is the swing effect).
Hence, subprime borrowers could no longer payback their monthly mortgage payments. Normally, he
should then make losses but since he has taken out CDS, those latter hedged his bank position in case
of a credit event. He could even make profits if his CDS more than made up for the losses resulting from
the default of borrowers.

• The Big Short

In 2005 alone, there were 500 billion in housing bonds sold.

The ABX is an index that tracks subprime mortgage bond values. In 2006, the ABX lost down three
points in one year.

Greg Lippmann uses a game of stacked wooden blocks to explain the operation of basic mortgage bond.
At the very beginning, thousands of AAA-rated mortgages were pooled together and shorted with a
guarantee from the US government. However, at some point, things changed.

Now mortgage bonds were made up of layers of tiers: from the safest AAA-rated, to the riskiest B-rated
which took on defaults first. Hence, the last tranches hit the rock bottom FICO1 scores which assess
borrower’s creditworthiness. At the time, default rates were already up from 1 to 4%. When they raised
to 8%, these BBBs became worthless.

Virtually no one knew exactly what was in those bundles. Thus, it might explain why so few people
noticed that the underlying bonds were actually junk. Therefore, banks were selling those bonds that
were officially rated AAA. Nevertheless, those pools were made up of 95% subprimes with FICOs
below 550.

The B, BB or BBB-rated unsold bonds were repackaged in bundles creating what it is so-called a CDO.
Then, when this pool of rotten bonds was considered sufficiently broad and diversified, the ratings agen-
cies assessed it 92, 93% AAA without asking question about its compounding. Institutions treated these
CDOs like they were as solid as treasury bonds. However, it was not the case at all. CDOs were used by
the banks as a way to improve their accounting books.

He offers to FrontPoint Partners' traders to short the subprime mortgage bonds and to buy CDSs. Indeed,
according to him, if the collapse of the housing market occurred (and to his mind, it will), they could
make a 10 to 1, even 20 to 1 return. He compares the CDSs to a fire insurance.

1
A FICO score is a credit score created by the Fair Isaac Corporation, which assesses individual's credit worthiness. It’s based
on individual's payment history, current level of indebtedness, types of credit used, length of credit history and new credit
accounts. Those scores range between 300 and 850. Scores above 650 usually indicate a very good credit history, making easier
to obtain financing at favorable rates.

Lenders consider borrowers' FICO scores but also his income, the stability of his job, the type of credit requested, etc., in order
to rate credit risk and determine whether to extend credit.

Page n°2
 Amélie Sicart de Taqui – MBF1 (2018-2019)

VOCABULARY
ENGLISH FRANÇAIS
Brash Impétueux
To dwarf someone or something Rapetisser (éclipser) quelqu'un ou quelque chose
To get ripped off Se faire arnaquer
Inside information Informations internes
Mainstream Courant dominant (traditionnel)
A pitch Un terrain
To rake in money Gagner (engranger) de l'argent
To revolve around something Tourner autour de quelque chose/d’un sujet
Risky Risqué (hasardeux)
A small investor Un petit investisseur
Stuff (uncountable) Des trucs
To sucker someone
To trade against someone Échanger (commercer) avec quelqu'un
To be wary Se méfier
A wig Une perruque
Mean-spired Mesquin
It is worth noting Il convient de noter
A portrayal Une représentation/un portrait
For starters Pour commencer
Eccentric Excentrique
To be portrayed Etre décrit
Lovable Aimable
To get a feel for Se faire une idée de quelque chose
To be loosely based on him S’inspirer librement de lui
Flavour Du goût, de la saveur
Financial lay of the land Le contexte financier, la configuration financière
To be eager Etre désireux
Diplomatic Malin/ingénieux
The finance mogul Un magnat de la finance
To look forward Avoir hâte
Subsequently Par la suite
It includes some jabs at this hairstyle Porter des attaques à l’encontre de quelqu’un
To head Prendre la direction, prendre la tête
An insider trading Un délit d’initié
To elude Éluder, échapper
Heavily Lourdement
Outright lies Des mensonges purs et simples
Blatantly De manière flagrante
A pit full Une fosse remplie
Until Jusqu’à
Upon À
To turn up Arriver, se présenter quelque part
To remove to Enlever de
To collide with Entrer en collision
To claim Prétendre, exiger
To cease Cesser
To be going sour Commencer à mal tourner
Astonishing Étonnant
Nearly Pratiquement
Unless À moins que – sauf si
In a nutshell En un mot
Merely Uniquement
Fancy Élégant, déguisé
To turn up out of nowhere Sortir de nulle part

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 Amélie Sicart de Taqui – MBF1 (2018-2019)

Bluntly Sans management

To dub someone Surnommé quelqu’un
To bother Déranger, importuner
To hint Insinuer, laisser entendre
To hint at Faire allusion à
To crave Solliciter, mourir d’envie, implorer
Once Une fois que, dès lors que
To despise Mépriser
To brim Déborder
To keep tied up Maintenir attaché
A unit Une filiale
Thereby Ainsi
To rose to fame Se rendre célèbre pour
As early as 2006 Dès 2006
Opaque Opaque
To come/work under the umbrella of Relever de la supervision de quelque chose
To be affiliated to Etre affilié à
The operation Le fonctionnement
To warehouse Entreposer
A bunch Une série
A layer of Une couche de (une tranche de)

Page n°4
 Amélie Sicart de Taqui – MBF1 (2018-2019)

WEEK 6 – THE HOUSING BUBBLE 1

Ø SCRIPT VIDEO

He just won the Nobel Prize for economics.

J: You are the bubble man in the public mind, in the financial mind. But, how do you define bubbles?
How they develop? How do you recognize them?

S: Well, my co Nobel Prize winner Eugene Fama says that the profession has no definition of a bubble
and that he attributes the term bubble to the news media, including economists. Everything is a bubble,
that is Fama’s assertion but he is correct about the origin.

There was an earlier word called “windhandel” in Dutch, wind trade. Indeed, The Dutch began to de-
scribe the tulip futures trading as windhandel, or “wind trade” because no bulbs were changing hands.
It’s kind of bubbly sounding word referring to the kind of speculation that was going on in the Tulip
Mania in the 1630s. So, the dictionary says the bubble, in this context, means some speculative asset
prices that is filled with air and is incorrect. So, it sounds like it is mispricing but I don’t think that
captures what we mean by bubble.

When I wrote the second edition to my book “Irrational Exuberance”, I thought I had to actually define
what do we mean by a bubble and I actually found that it was difficult to define in a few words.

It’s a price mediated feedback that people are observing prices going up and it’s bringing attention, it’s
bringing millions of people in who weren’t paying attention before. Then, they amplify the feedback for
a while by buying into it. Eventually however the price gets ridiculously high and people like Economist
Magazine start pointing out the folly of it. And then, it suddenly turns and bursts.

J: Is there a mathematical definition, I mean?

S: But that is not a complete.

It’s a whole phenomenon that it’s like a mental illness but it’s a social mental. It’s something that occurs
from time to time and it’s marked by a list of symptoms, which may appear differently in different
circumstances:

- Excessive enthusiasm;
- Participation of news media;
- Feelings of regret among people who weren’t in the bubble in adequacy;
- Feelings of envy for others;
- Feelings of meaninglessness in their work.

He is talking as a psychologist (his wife is a psychologist).

A bubble is a psycho economic phenomenon. It’s also even gets involved in people’s views of them-
selves and their identity, such they start to think differently: "I used to be ignorant but I have discovered
my investor-self and now, I pride myself on knowing things about investing and reading in newspapers
and magazine”. As the bubble progresses, it becomes really ingrained in a culture and when it finally
bursts, it is devastating for some people because it rips out their self-esteem and then, they go through a
period of a negative bubble.
 Amélie Sicart de Taqui – MBF1 (2018-2019)

HOMEWORK CORRECTION – 11/06/2018

So first, we will start with the text that we had to complete.

Ø QUESTION 1

ASSET

CREDIT CYCLE

INTEREST RATE

MOMENTUM – MISSING OUT

SKYROCKET

WARNING SIGNS – SELLING

RESERVE – SUPPLY – LIQUIDATE

Ø QUESTION 2

At the begging of the 2000s FED interest rates were kept low. A lot of mortgages were extended. More-
over, housing prices increased and banks repackaged loans. Banks had incentives to extend more and
more mortgages.

But when market saw that borrowers were not solvent, the crisis burst.

Because borrowers cannot pay back, banks had to seize houses and resold them so the housing market
was bearish.

VIDEO

Well, if there is no question regarding what we have just said, let’s move on to the video. We hope that
everyone has seen it before!

Ø QUESTION 3

He was born in 1946. It is an American economist who is considering by mostly people as one of the
most influential economists of the 21st century. He is a Sterling Professor of Economics at the Univer-
sity of Yale.

He is regarded as a pioneer in the behavioural economics theory. He notably managed to predict the
bursting of the bubble in information-technology stocks in 2000. In September 2007, he predicted an
impending collapse in the US real estate market, and subsequent financial panic.

He is also the co-creator of the S&P/Case-Shiller Home Price Index, which monitors evolution in the
average price of residential real estate in some major US towns.

In 2013, he won, with Eugene Fama and Lars Peter Hansen, the Memorial Nobel Prize in Economics,
for their empirical analysis of asset prices and on the underlying rationality of financial markets. We
will focus on this specific point.

Ø QUESTION 4
 Amélie Sicart de Taqui – MBF1 (2018-2019)

He doesn’t use a specific economic vocabulary or technical words as one would expect from a Nobel
Prize Laureate. However, saying that he uses a casual register would be maybe too strong.

Actually, he seems to explain that because there is no official definition of a speculative bubble, it’s
complicated to define and describe precisely a phenomenon that is not only economic but also psycho-
logical. That’s why he says that “I’m talking as a psychologist”. It’s even more than that because, to
some extends, he behaves like a psychologist: for instance, by using the pronoun “I” to explain or inter-
pret people’s decisions and feelings.

Eventually, regarding his manner of expressing himself, we can see in the video that he uses a lot his
hands when he is trying to explain what a speculative bubble is. It’s maybe to help people to understand
or to figure to oneself a phenomenon which is, in a way, abstract.

Ø QUESTION 5

According to the Oxford Dictionary, a feedback is “the reaction to a process or activity”, or to infor-
mation obtained from observations, behaviors or opinions of others”.

Based on this definition, a bubble is a reaction (and so, a feedback) to rising prices (which represents
here a process) that is relayed by a growing number of individuals and media.

Some people note that there is a gradual increase in prices: the more prices continue to rise, the more it
attracts people's attention (Robert Schiller talks about "millions of people"), especially the people who
were not paying attention before. For a while, a positive feedback gains momentum due to a growing
number of people who buy into it.

However, when some people or news media start to underscore the irrational nature of this price in-
crease, all investors want to sell massively (in order to avoid huge losses), which stimulates a negative
feedback and finally leads to the bursting of the bubble.

Ø QUESTION 6

According to Robert Shiller, excessive enthusiasm and feeling of regret are symptomatic of bubble and
social mental illness.

Bubble is a psycho-economic phenomenon. In fact, it is because people feels that market are bearish
that it is bearish. If a lot of people sells their assets at the same time price decrease and panic settles.

Moreover, when bubble bursts some people feels that as a personal fail. Investors spend a lot of time to
choose the best portfolio, so, when market bearish, they are devastating.

Ø QUESTION 7 → MAKE A GRAPH!

The first step

Observation of an economic phenomenon: an increase in the prices -> excitation: “Excessive enthusi-
asm”.

The second step

It catches people’s attention (especially those who were not, at first, concerned by that, people who tend
to not invest for instance) and news media’s attention: “millions of people” and “participation of new
media” which led to a positive bubble/feedback.
 Amélie Sicart de Taqui – MBF1 (2018-2019)

Lots of feelings among people: “I used to be ignorant but I have discovered my investor-self and now,
I pride myself on knowing things about investing and reading in newspapers and magazine”.

It becomes not only a psycho but also a social phenomenon: which “is ingrained in the culture” meaning
that it is a part of the culture. It’s maybe linked to the myth of “the self-made man”.

The third step

News media and some people notice that the prices are too high, they are expected to decrease. Some
people start to sell their assets in order to avoid huge losses.

As the bubble decreases, people who didn’t invest or maybe, invested too late can have some: “feelings
of regret”; “feelings of envy for others”; “feelings of meaninglessness in their work”. That shows us
again how a speculative bubble is such a psychological phenomenon.

The fourth step

The bursting of the bubble = period of a negative bubble/feedback. Vicious circle → Everyone short
massively.

The last step

Eventually, depression: because some people were so involved (mentally and financially) that the burst-
ing of the bubble “rips out their self-esteem”. On top of that, they may have lost a lot of money.
 Amélie Sicart de Taqui – MBF1 (2018-2019)

DURING THE LESSON

The team goes to Florida to invest against the market.

Simple house. Newspaper. Farmer. Swimming pools but nobody live in it, there is newspapers affront
the house.
Abandoned building sites.

Tattoos. He is just waking up. He works maybe shifts or nights. He pays his rent, he is a tenant. Perhaps
non-well educated :”What’s up man?” → casual language. He is maybe not from a well-educated back-
ground. His shirt is soiled.
The landlord → the person = the ownership of the home.
To be delinquent in the payment= to pay too late. The borrower is late in the payment, ri
The landlord is over 90 days delinquent in his mortgage payments.
If the bank forecloses the tenant could be evicted.

The landlord filled out his mortgage application using his dog’s name. There was no verification of the
applicant’s documentation by the bank.

Targeted by the mortgage brokers. They were also the victim, on the frontline for the eviction. Banks
would provide advertising in Spanish in order to catch the poor immigrant population.

Social inequality fuelled the crisis. It shows the gap between WS and main street, mains sreet should
have known what WS was implemented.

Pay mortgages
Kids
It’s not my fault

Other house
No TV
Lots of papers and letters
Unpaid bills

Crocodile

Music

Ø Bubble activity:

Tulipmania
Displacement: new product on market
The price:
Barter: le troc
People used credit in order to purchase it. They were interested in future profit
Huge impact on the Dutch economy for long decades
Asset prices shrink
Usually by at auction.
Bidders → bid.

1929 →PA, Jessica,

 Amélie Sicart de Taqui – MBF1 (2018-2019)

Crisis began in 1929.

Displacement: new products, Evolution of the economy during the 1930s thanks to automobile sector,
electricity, etc.
Evolution of the consumption model: radio but also in media: radio. New communication.
The money was not equitably distributed.
Period of prosperity, people felt confident.
Easy access to credit, stagnation of wealth wages,
A climate of confidence by the creation of the FED (1913) which will supposedly control the money
supply, able to control the boom and the cycle.
FED made huge mistakes because interest rates were kept low, a bank run in the economy (when people
ask banks for liquidity) link to radio because people hear this information on the radio.
They fuelled the bubble even more because they were informed.

Dotcom bubble →Nathan, Axelle, Victor

1994.
Displacement: Excessive internet web development
Invest in new firms which in development.
Ground floor, fear of missing out, to be part of the action
3 mains causes of the bursting of the bubble:
The stock of firms really skyrocketed:
The government and the FED kept interest rest very low and suggested people to invest in technology
The investors didn’t really care about the profit and the cost
Investors are bullish, they believe that it’s a good opportunity
Small companies with cost but with no revenue
People didn’t really realize what they were doing
Generated by their stock
IPO: initial public offering
Sometimes, the revenues of companies had as only revenue the IPO.

Government failed to regulate the market, the encouraged people to invest.

Easy money, easy credit. People’s goal: make profit from the social productness. Replicated the success.

Each time, people believe those things: people are more confidence in institutions and regulations. New
paradigm, product is difference and so, change of paradigm, the market and regulation is different and
so the problem cannot happen again. Linked to ego.

The best informed investors leave the market first. Informed investors heed the warning signs recognize
the market is overheated, and sell their position. This creates a plateau.

F. They look for someone to blame. They recognized that they should have seen the warning signs.
(Structure of the past modal)
 Amélie Sicart de Taqui – MBF1 (2018-2019)

VOCABULARY
ENGLISH FRANÇAIS
To be delinquent in loan payments Être en retard dans les paiements de prêt
A dot-com company Une entreprise de com
Deregulation Déréglementation
Easy credit Le crédit facile
Easy money L'argent facile
To envy Envier
To gamble Jouer en bourse
To get in on the ground floor Entrer au rez-de-chaussée
The hindsight Le recul (la sagesse rétrospective)
A housing development Un lotissement
Hype
To inflate a bubble Gonfler une bulle
IPO (initial Public Offerings) Une offre publique initiale
A landlord Un propriétaire
A low-income group Un groupe à faible revenu
To overheat Surchauffer
To rent Louer
A share Une action
A stock Une action
A tenant Un locataire
The underlying problem Le problème sous-jacent
 Amélie Sicart de Taqui – MBF1 (2018-2019)

WEEK 7 – THE HOUSING BUBBLE 2

Iamtranslator text to speech

At the same time

To borrow from the bank
A bank grants a loan

For 10 years, interest rate have been rising.

Also, ever, never, already, yet → present perfect.

It might be/it could be (not use : It’s maybe …)

Correction of the assignments

1. It confirms it. People are tended to buy a house, because of their family and friend who did the
same things.

2. Observation of the credit bubble:

Low interest rate

Decrease of the house prices

Impossible to pay back their loans

Disconnection between the market value and the real value.

3. Definition.

4. Definition.

5. No one and all the people at the same time. The entire economy.

Video

Florida.
Crazy → calm down.

Increase. More than 600 last year.

House → value is more important.
Market is thriving?

Broker.

Real estate agent = a realtor. How does she describe the market?

It has been crazy,

It’s a gully, a deep but she is not expected the market to stay low. Sign of a deep in the market = “for
sale” signs in front of many houses. She gives the example of a house: 350,000 the year it was b(u)ilt
(pronunciation). Then: 2 years later: $480,000; $585,000 18 months ago; $650,000 last year. They would
leave it for that even if it’s broke their hearts, meaning that there is a plateau in the prices. Regarding
 Amélie Sicart de Taqui – MBF1 (2018-2019)

the evolution: usually, property s a long investment, but it is not the case here: people/investors are
flipping property. Clearly, which stage in the bubble did you recognize: it is profit taking, investors are
selling their position in order to make profit (Minsky → profit taking phase), end of euphoria.

Lippmann:

A whack job
A slicked-back hair: to put wax on his hair.
He brags
To be tightly wound: → a nervous people, he might probably exploded if someone say something they
disagree
Wind
Wound → une blessure
A loud tie: flashing/visible
He speaks quickly

People are winding him up→less unformal, people are playing with him.
He has a lot of self-esteem (a lot of ego, he should be paying more)
He … the authority
He is very direct, difficulty to hide his real nature
He has no allegiance to his company, he get paid and that all

He was like controversial. He is unlike people who are self-interested. He recognized people who are
self-interested. He loves making people uncorfortable.
He would not be a person to work with.
He is rude, costic, aggressive, brash (very direct)
 Amélie Sicart de Taqui – MBF1 (2018-2019)

VOCABULARY
ENGLISH FRANÇAIS
Beneficial Bénéfique (avantageux)
A home-equity loan Un prêt immobilier
Inflated values Valeurs gonflées
To loom Tisser (surgir, apparaître)
Monthly instalments Des paiements mensuels (des mensualités)
A mortgage broker Un courtier en hypothèques
A real-estate agent Un agent immobilier
A realtor Un agent immobilier
Unsustainable Non durable (non soutenable)
 Amélie Sicart de Taqui – MBF1 (2018-2019)

WEEK 8 – SUBPRIME MORTGAGES AND LEVERAGE

I. Assignments to be prepared at home

A. Document 14

• Question 1: What incentive structures were in place for bankers and mortgage originators in the
run-up to the subprime crisis?

Lax laws/laws that provided deregulation of the financial and the banking system putting at risk the
whole economy:

- The Gramm-Leach Bliley Act (1999) which partly dismantled the Glass-Steagall Act (1933)
which was at the origin of the class US distinction between commercial and investment banks
→risky practices and shadow banking.
- Corporate governance laws such as the Sarbanes-Oxley Act (2002);
- SEC net capital rule (2004) which allowed investment banks (with more than 5 billions dollars in
assets) to use their own risk model in order to manage their risks. The regulators didn’t pay atten-
tion to the systemic risks and led to a lack of oversight and regulation. As a result, banks under-
estimated and/or misjudged risks by using securitization for instance. It also provided incentives
to engage in extensive off-balance-sheet accounting.

Banks paid their senior executives with huge stock options for being short-sighted and excessively risky
behaviour. Lax regulation let them get away with it. The mortgage brokers neglected due diligence,
since they would not bear the risk of default once their mortgages had been securitized and sold to
others.

The transactions costs generated by writing mortgages provided a strong incentive to target financially
illiterate people (inexperienced borrowers).

The ratings agencies that judged subprime securities as investment grade. But also influence peddling
(money for good grades for instance).

The FED, which lowered interest rates. It allowed banks to open more and more credit line.

The too big to fail believes: the government could bail out financial and banking institutions if a crisis
occurs.

• Question 2: What was the source of high bank profits during this period according to Stiglitz?

They took huge and excessive risks by using securitization and encouraging people to use it. People
treated their houses as ATMs, repeatedly borrowing against their value, meaning that they had to re-
finance it several times with “no-doc” mortgages (no supervision, no income control). However, short-
term loans supported actually never-ending fees, which generated unprecedented profits and then, un-
heard-of bonuses.

When people became over-indebted and could no longer pay their loans, banks were getting their money
back by seizing their houses and then, putting up them for auction (= selling them back) and getting the
proceeds from that sale.

Besides, they bundled the mortgages, arranged them according to their risk and eventually repackaged
in tranches. Afterwards, they sold those MBSs to numerous investors in order to share risk and protect
themselves. They also bet against it (in order to increase once again their profits).

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 Amélie Sicart de Taqui – MBF1 (2018-2019)

To sum up, highly risky financial practices coupled with excessive leverage had created high return for
banks.

• Question 3: Were the bankers aware of the inherent danger in the system?

Yes because we can read that “the mortgage originators […] could claim they were just doing their job”
suggesting that they were aware of the inherent danger in the system.

There were also employees who knew that “the danger was ahead”. Some of them even wrote a report
regarding this issue for the regulators: “expect fallout, expect disclosures, expect horror” (January 2006,
Paris Welch).

The last sentence of the text is quite striking: “Some weren’t aware of the casualties until the system
collapsed”, which clearly means that some bankers were not aware (or rather did not want to pay atten-
tion) of inherent dangers of their actions (hypocrisy and bad faith).

B. Document 15

• Question 4: What is a “subprime” borrower?

Subprime borrower: a would-be homebuyer whose creditworthiness is low because he already has a
high level of debt, a relatively low income, or a poor credit record. Banks classify those specific bor-
rowers as individuals who may have greater difficulty paying off a mortgage.

• Question 5: How did banks’ attitude to this group change during the housing bubble?

Normally, banks either refused them or charged them a higher interest rate to offset the increased lending
risk. However, during the housing bubble, mortgages became accessible to a higher number of home-
buyers but also to those specific borrowers. Indeed, the criteria for mortgage eligibility were relaxed and
the interest rate charged was lowered. They were now actively encouraged to buy houses that they could
not realistically afford.

C. Document 16

• Question 6: How did inequality fuel the subprime crisis?

Since the 1980s, the US income gap between rich and poor has been widening to levels not seen since
the 1920s. It was mainly due not to real income declines for the poor and middle classes but to relative
gains for the wealthy.

However, since 1999, the median US household income has dropped, implying that the low and middle
classes were now losing in absolute terms as well. Most US household now faced difficulty even retain-
ing their customary level of consumption.

Policymakers could address this ongoing issue in three ways:

- The “laissez-faire” option: let market forces to reduce, over time, income inequalities;
- To alter the tax and spending mix;
- To encourage credit expansion and maintain lower interest rate.

Actually, they combined the first and third options.

Lack of supervision because the priority was given to the struggle against the social inequalities.

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 Amélie Sicart de Taqui – MBF1 (2018-2019)

A widespread perception of falling living standards, largely a consequence of income inequality, was
probably sufficient to provoke a rapid increase in demand for loans.

• Question 7: What is the link between home equity loans and inequality in American society?

In the run-up to the crisis, consumption continued to increase despite declining incomes. Expectation of
continued inflation in their home’s value doubtless encouraged families to spend more money than they
had.

• Question 8: Alan Greenspan, Chairman of the FED, maintained interest rates low between 2000
and 2005. How did this contribute to the crisis?

The FED lowered interest rates. It allowed banks to open more and more credit line, especially for
unqualified borrowers (such as subprime borrowers) → build-up of risky lending partly intensified the
expansion and deflation of the housing bubble.

Hence, mortgage borrowing doubled from an annual average of $500 billion from 1998 to 2002 to $1
trillion in the 2003–2006 period. Moreover, in 2002, less than 10% of US mortgages were subprime
comparing to 25% in 2005. In 1980, US households held an average debt level equal to about 60% of
disposable income comparing to 130% in 2007.

When housing prices eventually started to decrease in 2006, they became unable to keep up with con-
tinuing mortgage payments (banks granted no longer subprime credit). For those whose home values
dropped in the subsequent collapse, it often became more sustainable to default and face foreclosure
than continuing to pay, because the monthly payments were based on the original value of the home.
The resulting wave of subprime foreclosures accelerated the falling prices by creating a glut in housing
supply. Meanwhile, the widespread tightening of credit led to a drop in demand, which, coupled with
an increase in supply, was a recipe for lower prices.

Many factors were behind the Great Recession:

- The will of financiers and bankers to maintain high returns for their loans and investments, in
the process downplaying that risks were often, in the end, borne by others.
- A trend towards deregulation of banking and financial system.
- Economic globalization also provided fuel for the crisis, and allowed it to spread more rapidly.
- These other effects range from growing inequality among the US population, to the structure
and functioning of large economic institutions, to global trends and issues.

The trend had broad bipartisan support. Indeed, many policymakers greeted it with optimism rather than
skepticism. It seemed to be a clever way of addressing the economy’s need for sustained consumer
spending while avoiding the thornier issue of inequality or unpopular government action.

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DEFINITIONS

ATM (Automated Teller Machine) is a machine that dispenses cash or performs other banking services
when an account holder inserts a bank card.

A home-equity loan (a.k.a., a second mortgage) is a type of consumer debt. It allows home owners to
borrow against their equity in the residence. The loan is based on the difference between the homeown-
er's equity and the home's current market value. Essentially, it’s a mortgage, and it also provides collat-
eral for an ABS issued by the lender and tax deductible interest payments for the borrower. As with any
mortgage, if the loan is not paid off, the home could be sold to satisfy the remaining debt.

Foreclosure: the process of taking possession of a mortgaged property as a result of the mortgagor's
failure to keep up mortgage payments.

MBS (Mortgage-Backed Security): a security composed of a bundle of many home mortgages issued
by independent banks. It was invented by Lewis Ranieri.

CDO (collateralized debt obligation): an investment product that packages together numerous assets
including MBS.

CDS (Credit Default Swap): a security that is effectively an insurance policy against defaults related to
MBSs and CDOs.

Subprime borrower: a would-be homebuyer whose creditworthiness is low because he already has a
high level of debt, a low income, or a poor credit record.

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VOCABULARY
ENGLISH FRANÇAIS
In the run-up to the crisis À l'approche de la crise (dans la période précédant)
Coupled with Associé à (couplé avec)
Widely Largement
To precipitate Se précipiter (se ruer, se hâter)
To exemplify Pour illustrer (pour donner un exemple)
Illiterate Analphabète (illettré)
To be getting into Être dans
The epicenter L'épicentre
A foreclosure Une forclusion (une éviction, une saisie)
On her/his behalf En son nom
The forms belied Les formes démenties
Deadly Mortel (meurtrier)
To keep up a payment Garder (maintenir, suivre) un paiement
To put up for auction Mettre aux enchères
The foot soldiers Les fantassins
The lower-level employees Les employés de niveau inférieur (subalternes)
A fallout Des pertes, des retombées
Undoing Perte, ruine, perdition
Fancy Fantaisie
Never-ending fees Des frais sans fin (interminables)
Unprecedented profits Des profits sans précédent
Unheard-of bonuses Des bonus inouïs
Hence Par conséquent (d’où, donc)
The rush La ruée
The casualties Les victimes
Unbridled Débridé (effréné, déchaîné)
A build-up of risky lending Une accumulation de prêts risqués
Either Non plus (soit)
To be relaxed Être détendu
A mere three years later Trois ans plus tard
To exult Exulter
The credibility La crédibilité
Countless borrowers D'innombrables emprunteurs
The proliferation La prolifération
To hasten Hâter (accélérer)
The downward spiral La spirale descendant
A glut in housing supply Une surabondance de logements
A widespread tightening of credit Un resserrement généralisé du crédit
A recipe Une recette
A would-be buyer Un acheteur potentiel
The creditworthiness La solvabilité
To soar Monter en flèche (survoler, grimper)
Above Susmentionné (supra)
Typically Généralement
To turn down Refuser
To keep up with Faire face à
Adjustable rate loans Prêts à taux ajustable (variable)
Applicants Les candidats (un demandeur, un postulant)
A bundle Un paquet (une liasse)
Default on loan payments Défaut de remboursement de prêt
Delinquent on mortgage payments En retard sur les paiements hypothécaires
A down payment Un acompte
To downplay something Minimiser l’importance de quelque chose
Equity Les fonds propres (les capitaux)

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 Amélie Sicart de Taqui – MBF1 (2018-2019)

Foreclosure Forclusion (une saisie)

To grant a mortgage/loan Accorder une hypothèque / un prêt
Home equity La valeur nette immobilière (d’une maison)
Home equity loan Prêt sur valeur immobilière
Lenders Des prêteurs
Leverage Effet de levier (ou influence)
To make a down payment Faire un acompte
A mortgage broker Un courtier en hypothèques
The oversight La surveillance
A prime mortgage loan Un prêt hypothécaire
The principal on a loan Le principal d’un prêt
To range from one thing to another Aller (varier) d'une chose à l'autre
Returns (high returns) Retours (rendements élevés)
A subprime mortgage loan Un prêt hypothécaire à haut risques
To take out a mortgage Contracter une hypothèque
A teaser rate Un tarif teaser
To borne Supporter (dans le sens supporter une charge)
A trend towards Une tendance vers/à
To be behind Être à l’origine
To widen Élargir
Policymakers Les décideurs politiques
To address Aborder un problème (répondre)
To alter Altérer (modifier)
To make up Indemniser (dédommager, compenser)
To meet their spending needs Répondre (faire face) à leurs besoins de dépenses
Otherwise Autrement
Realistically De façon réaliste (avec réalisme)
Thornier (adj) Plus épineux
A sharp increase Une forte augmentation
The disposable income Le revenu disponible

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