(My disturbing thoughts on the soon-coming Australian Version of THE BIG SHORT.)
If any Australian wise enough to understand the
movie “THE BIG SHORT” and then read Michael Lewis’s book “THE BIG SHORT” would
immediately realise the Australian version of “THE BIG SHORT” has been well
overdue here in Sydney.
Last 35 years since late 1990s, when the
Capital-Gain-Tax (CGT) was halved by John Howard’s Liberal Government, Sydney
houses have been in an incredible floating bubble massively super-inflated by landlords’
favourite the Negative Gearings, for the median house price has risen into the upper-stratosphere.
From well below A$ 100,000 in 1990 to well over A$ 1,000,000 now in 2025.
I still remember the day when I bought my first house in Sydney in 1990, I paid A$ 98,000 for that brick-veneer-three-bedders while I was earning A$ 48,000 a year as a production manager in an engineering company and my wife was on A$ 27,000 a year as a tutor in Sydney University.
Unfortunatey, even with our relatively high income
back then the Commonwealth Bank, unbelievably, rejected our mortgage application
to borrow just 90,000, which was just 15,000 more than our
combined-gross-salary of 75,000, because we were recent migrants and could not
establish a long enough saving pattern to satisfy their strict lending policy.
But we finally got an expensive homeloan from the
NSW-Government-backed Scam Lender called the HOME FUND which basically forced a
13-year mortgage at 21 percent interest-rate on us and we had to pay A$ 2,000
monthly to service that mortgage. Anyway, that HOME FUND eventually collapsed
and we horribly got stuck in a really fucked-up situation for a very long time.
Then in late 1990s everything about mortgages and
home loans suddenly changed and we even got repeated calls from the banks to
borrow from them. I was wondering why the fucking banks were suddenly relaxing
their so-called strict rules of lending. One thing I stupidly didn’t understand
back then was the stuff called Residential-Mortgage-Bonds and Securitization of
the residential mortgages.
Mortgage Bonds and Securitization of Mortgages
Normally the commercial or retail banks held the
mortgages in their own books and managed them themselves. But later some smart
investment bankers started what they now called securitization process by
buying and turning those mortgages into tranch-based mortgage bonds and making
tons of cash by selling those mortgage bonds (and associated CDOs) to
cash-riched institutions like pension funds and superannuation funds.
Mortgage bonds, or mortgage-backed securities
(MBS), are investment bonds created by pooling many individual home loans
together. These securities are sold to investors, who then receive payments of
principal and interest as the original homeowners make their monthly mortgage
payments. This process allows lenders to raise capital to issue more mortgages
and can provide investors with steady returns, though it carries investment
risk.
So suddenly the retail banks have plenty of cheap cash
to lend for more and more mortgages, more opportunity to raise the valuation of
residential homes, and thus generating more and more profits from those
mortgages. Banks and mortgage brokers basically started chasing anyone old
enough here in Australia to get a mortgage from them, with no questions asked. The
Sydney House Bubbles have started then and grown endlessly ever since.
The Big Short (USA)
According to author Michael Lewis, in early 2000s
some smart hedgefund managers in US started realizing that the so-called
investment-grade or AAA-Rated MBS are just bags of horse shit filled with so-called
sub-prime mortgages such as NINJA (No Income, No Job, No Assets) homeloans and NoDoc
(No supporting documents) homeloans, etc. So, they started shorting them MBS by
using the complex insurance products called Credit Default Swaps (CDS).
A credit default swap or CDS is a derivative
contract that provides a means of protection against credit risk. CDS contracts
act like a form of insurance. The buyer of the CDS contract is compensated by
the seller if a ‘credit event’ occurs to a third party (the reference entity)
within a specified period of time. The CDS buyer pays a fee (or premium) in
order to receive this credit protection.
Credit events can include bankruptcy, missing a debt payment, debt restructuring or a credit rating downgrade of the reference entity. CDS contracts are predominantly traded over-the-counter (OTC), that is directly between two parties rather than on an exchange. The reference entities on which CDS contracts can be written include corporations, governments, and asset-backed securities.
During 2008 GFC (Global Financial Crisis) US
housing markets collapsed and the CDS sellers such as AIG (American Insurance
Group) lost hundreds of billions of dollars while CDS buyers made billions of
dollars each from AIG and other gullibles.
AIG nearly collapsed due to massive losses from its
credit default swaps (CDS) on mortgage-backed securities, which it had sold
without adequate capital or collateral. The company's failure would have
triggered a domino effect, as many major global financial institutions relied
on AIG for insurance on their investments. This systemic risk led the U.S.
government to provide an emergency bailout of over $180 billion in loans to
prevent a wider financial collapse.
Is The Big Short (Aus) Coming Soon?
My questions now are (1) Is mortgage
securitizations widespread here in Australia, like back in USA in 2000s? (2) Is
CDS market overly active here in Australia, like back in USA in 2000s? If the
answers to both questions are YES, then we are in trouble. I’m still searching
the internet for the strong evidence of heated mortgage bonds market and CDS
liquidity here in Australia especially in the bubble capital Sydney.
Only comfort for us is Australian politicians
especially the Labor-led leftwingers has a very reliable solution for
preventing the rapid collapse of Australian housing market. The poor Indians in
the form of International-students-cum-delivery-drivers.
If there is any slight symptom of house-price-collapses
those Socialist motherfuckers will import at least 100,000 young Indians
immediately to shore up the housing market, like clever Kevin Rudd did during
the 2008 Global Financial Crisis.
Here in Sydney, we have nearly 200,000 Indian-born
people, that is nearly 5% of total Sydney population of roughly 5,000,000 as
the second largest group of foreign-born population in Australia, overtaking
the Chinese. Rumors are that Indian Government is now preparing to send a
million more young Indians to Sydney as a response to the Albanese Government’s
secret invitation.
