The Big Short is a 2015 Oscar-winning movie about the 2008 US housing crisis. It is a dummies guide to the subprime crisis and how it threatened the entire global financial system.
The entire movie crew did a phenomenal job of deciphering the complex financial instruments and their interdependencies so that a lesson could be learnt.
But the movie also ended with an ominous message which, I believe, has been forgotten!
In 2015, when the dust settled and all the promised reforms–either failed to take off or junked, financial institutions again started marketing CDOs under a brand-new label.
Call them whatever you want–CSOs or CLOs, the fundamental principles remain the same. They are opaque, hide risks by stuffing multiple securities in tranches, and become highly correlated during turbulent times.
Public memory is short, and investors act predictably; real reasons behind the phenomenal success of few quant-based hedge funds. They just place thousands of small bets on pricing anomalies caused by irrational behaviour.
Ultra-low interest rates and availability of capital make these options palatable for lots of individual and institutional investors.
It all looks like a frame-to-frame remake of an old classic!
And we all should pray that it fails to be released.