If it were gambling there would be a 51-49 split in returns somewhere along the way, with hundreds of hours and putting money into machines slowly eating away the money you earn, until you’re left a shriveled husk of a person with nothing to your name.
If you get into “The Big Short”, what you’ll discover is that this was effectively what the insurance on the mortgages accomplished. Buying insurance is a losing gambit (also called a hedge) wherein the underlying asset (the policy) loses money over time with the anticipation of a potential windfall at some unspecified event in the future.
What Mark Baum and Michael Burry had done was to effectively buy these insurance plans from the banks themselves, diverting the windfall from a crash into their own pockets. The banks shouldn’t have been auctioning off their insurance (for the same reason you shouldn’t try to sell your fire insurance claims on your house to your neighbor in an effort to turn a profit). But the investment was considered crazy precisely because these insurance plans only ever existed as a fig leaf for regulators and investors (even if we fail, we can’t fail, because we have insurance!) Nobody asked who was going to pay out this insurance or who was going to collect.
If you get into “The Big Short”, what you’ll discover is that this was effectively what the insurance on the mortgages accomplished. Buying insurance is a losing gambit (also called a hedge) wherein the underlying asset (the policy) loses money over time with the anticipation of a potential windfall at some unspecified event in the future.
What Mark Baum and Michael Burry had done was to effectively buy these insurance plans from the banks themselves, diverting the windfall from a crash into their own pockets. The banks shouldn’t have been auctioning off their insurance (for the same reason you shouldn’t try to sell your fire insurance claims on your house to your neighbor in an effort to turn a profit). But the investment was considered crazy precisely because these insurance plans only ever existed as a fig leaf for regulators and investors (even if we fail, we can’t fail, because we have insurance!) Nobody asked who was going to pay out this insurance or who was going to collect.