Shorting and the Risks it Presents

The amount of gears that rotate when dealing with the financial crisis of 2008 is unimaginable.  One of the most important aspects that light has been shed on if the aspect of shorting an asset, or short selling a house.  This is one of the aspects that the Turner family considers in the novel The Turner House by Angela Flournoy when dealing with the housing crisis in 2008 that caused them to lose the thirteen Turner siblings grew up in.  this is one of the aspects of The Big Short did not make clear when addressing.  Michael Burry is one of the key people when thinking about the housing crisis of 2008, he had predicted two years prior that the subprime mortgage bonds that banks were handing out were bound to fail.  This aspect can be seen in respect of the Turner family in the way that they lost their house.  The twelfth of the turner children, Troy, considers short selling the house to his current girlfriend Jillian.  Short selling, according to Investopedia’s online dictionary, is an investment in which one believes will decline and will sell that asset and then proceed to buy it back at a lower price than what it was sold for.  The issue with short selling is that there is an incredible amount of uncertainty in which that value will continue to decrease or raise again.  The Turner House clears up the risk vs reward aspect of short selling in the 2008 housing and financial crisis as The Big Short focuses on bigger aspects of the crisis instead of what was happening to individual families such as the Turners. 

            Short selling any asset is risky business and should only be used by investors or traders who are experienced and pay careful attention to the markets that they are attempting to short sell in.  One of the main problems with short selling is that people may try and predict where the market will go, but the market is unpredictable and can go anywhere any day.  One place where short selling is visible is within The Big Short, Michael Lewis describes how Greg Lippmann had his, “noble army of short sellers betting against the loans” (Lewis 227).  After Michael Burry persuaded Wall Street brokers to allow credit default swaps for mortgages it allowed for the banks to pursue short selling.  A credit default swap is basically insurance on a company, if one believes that a company would default, they would be against them and in return when they would default, they would see a return earning of more than what they had originally gambled when betting on the market.  This allowed Michael Burry to begin shorting mortgages because he was predicating looking at the way the banks set up these unfair mortgages, they were all bound to fail.  Steve Eisman is another former businessman involved in shorting and short selling mortgages during the 2008 housing crisis.  He had predicted that he would make a great sum of money when being able to short the stocks in companies that were giving out subprime mortgages: “The very first day we said ‘There is going to come a time when we’re going to make a fortune shorting this stuff.  It’s going to blow up.  We just don’t know how or when’” (Lewis 24).  Eisman was able to predict the way in which these subprime mortgage companies allowed him to short the stock and sell it just before the company began to fail.  Burry put his money into subprime mortgage lending companies that had not made enough of them to go bankrupt when the market was to come crashing down.  The crash happened and it left families like the Turners in a particular position of having to figure out where they would get enough money to pay for the house that was sold to them when their interest rates shot through the roof.  One of their options, short selling the house in which they grew up.

            Short selling for a family in the position of the Turners is a much different risk than short selling stocks in a company like Michael Burry and Steve Eisman were picking up on.  For the Turners it’s a matter of saving the house that all thirteen kids were raised in at some point in their life; they all have a connection to the house.  Troy, one of the youngest of the Turner children, has taken to the idea of short selling the house to his girlfriend Jillian since she is not connected to his family on paper at all.  They would be able to sell the house to Jillian for a low price and then the Turners would be able to purchase it: “He and his girlfriend Jillian might not have the $40,000 needed to absolve Viola of her debt, but they had enough to buy the house for the price any interested stranger would be expected to pay” (Flournoy 64).  Troy here is thinking about a possible way to save his family’s house.  This issue is that his family does not trust the relationship that him and Jillian have, as a result it would be difficult to convince them to sell it to her.  The uncertainty in this situation is if Troy and Jillian broke up, she would legally have possession of their house.  Troy is so desperate to keep the house he is even willing to undergo fraud to be able to short sell it.  He has a friend David who is able to help him in terms of forging paperwork.  The risk of this is that Troy can potentially lose his job and get put in jail because what he is planning on doing at this point in the story is illegal.  David describes the risk of possibly getting caught by describing what had happened to a colleague he knew who had gotten caught saying, “The feds brought the guy up on fraud charges, and my friend had to testify in in front of a grand jury” (Flournoy 65).  He continues to talk about how his friend was subpoenaed and had to get all of his records for the court.  This is just the beginning of the process Troy would have to undergo if he was to get caught.  The risk of being able to short sell the house for Troy is much different than the risk for Eisman and Burry.  If Troy gets caught it would ruin his life; if Burry and Eisman got caught they’d just be betting against housing mortgages that had the possibility to fail on them, but they knew that it would work out in their favor.

            This defined a generation of house buyers as many of them were set up to fail right from the onset of receiving their mortgages.  This affected everyone in the United States; the market crashed because bankers were signing triple-A loans to people they knew would not be able to pay it back and then made money betting that they would fail.  The lack of regulation made it so none of the main bankers and brokers who were doing this got in trouble.  There was one arrest, and in the end, it was dismissed.  The entirety of the United States population of people who own houses should care about the fact that the 2008 housing crisis happened.  It should now be known to homeowners that subprime mortgages must be read carefully; they may say an interest rate is going to be 7% but if a buyer is not looking for it in the contract after two years it would skyrocket.  The banking industry was filled with sleezy people who were willing to lie to their customers in order to better themselves. 

            The Turner House provides clear look into a struggling family during the 2008 financial crisis.  The view from The Big Short shows the inside wheels that were turning during it and identifies important characters and the roles they played in the crisis.  Michael Burry is an example of this with how he convinced Wall Street brokers to allow credit default swaps on mortgages because he realized what was going to happen with the housing market.  Troy as a character demonstrates the risks people who had invested and received houses were willing to go to attempt to stay in their house.  Troy, like many others, is attempting to cheat a system that already cheated him.  The issue is the risk vs reward of short selling the Turner family house.  This was a position a large majority of people who owned houses in America during this time faced due to the selfishness of the banking and stock market and The Turner House provides a fictional first-hand account of a family that was struggling at the same time The Big Short is in progress.

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