Advance Issues In Accounting
Added on - 28 May 2020
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Running head: BIG SHORT1Advance Issues In AccountingName:Institution:Date:
BIG SHORT2IntroductionIn 2015, the Big Short movie was realized based on the events that led to an economiccredit crunch. Wall Street guru Michael Burry has noticed that the economic conditions andsituations in America has put a number of home loans in danger of non-paymentanddefault.Greedy opportunists such as Jared Vennett, banker, Mark Baum, hedge fundspecialist and others notice that Burry bets against the housing situation and swapping morethan $1Billion of investors’ money into credit. Theses opportunists make a fortune by takingfull advantage of impending economic collapse and housing collapse in America(Goodstadt,2011).In the scene where Mark Baum meets a CDO manager, he realizes that the markets have goneto the dogs. He is frustrated by realizing that the American market will collapse and peoplewill lose the jobs and their investments will run into ruins. In short, bank after bank inAmerica are selling bonds to unsuspecting customers and investors with the guise that theyare highly valued and will only reap hefty rewards(Scott, 2010). The bonds are at the timevalueless or have a very low value compared to the selling price. After offloading thecorporate bonds to the customers, they will later devalue them leading to massive losses tocustomers and hefty profits to banks. Nobody is willing to tackle the situation. Opportunistslike the CDO manager that Mark meets will make a fortune just by buying and selling at theright time(Taylor & Clarida, 2014).The ethical issues in this scene is that the capitalist world is very greedy. People will make afortune in a capitalistic market where morality is not necessarily followed(Burnett,2010).Insider information is also crucial in controlling the market and destabilizing themarkets. People with insider information like the synthetic CDO manager will manipulate
BIG SHORT3information in the system. They take advantage of deregulations of the bond system. Marknotices that the greed in the system is abnormal and is worried that the number of home loanswill be defaulted(Dolezalek, n.d.). The economy will crumble and the housing bubble willbust.Factors that contributed to the eventDue to deregulation of the financial industry in the United States, banks actively engaged intrading of derivatives using hedge funds. These banks then demanded mortgages to supportthe sale of the derivatives. That created the global financial crisis that led to the greatrecession considering the United States is the biggest economy in the world.Securitization isanother factor that led to the 2008 financial crisis(Law & Hesselbaum, 2015). This is wherehedge funds and other institutions sold market –backed securities and other derivatives tosecondary markets and the mortgage is used as a security. The third factor that led to theeconomic crisis and latter global recession is the growth of subprime mortgages and the fedraising the rates of the subprime mortgage borrower. Due to low rates in subprime mortgages,many people took the loans and could not afford to pay up(Goodstadt, 2011). It had become avery industry worth more than $1.3 trillion.Homeowner’s were issued with bills they couldn’tpay.A financial or accounting event that could go hand in hand with the bubble bust in thehousing industry is the collapse of many hedge funds. An example is the collapse of manyhedge funds. Dr. Michael Burry a hedge fund manager managing more than $550 millionclosed his Scion hedge fund. Dr. Burry in one of the scenes visits several banks showingthem how the market will crumble under the weight of mortgages but is even laughed at andridiculed by employees of these top banks(Scott, 2010). Deregulations led to increased saleof derivatives by the banks which in turn led to the financial crisis being experienced. .