The Big Short: Inside the Doomsday Machine

What is the principal financial instrument used to bet against a bond, and how, briefly, does it work?

Moody’s and Standard & Poor’s both decide to rate a bond as AAA. Give one reason why you should trust their judgment and one reason why you shouldn’t.

Housing prices continue to rise, and you are offered a no-credit-check, no-down-payment second mortgage on your small but comfortable house. List two financial reasons why you should take the deal and two financial reasons why you shouldn’t.

Insurance giant AIG gets into trouble from one of its products related to investing. What is the product, and how might AIG have reduced its risk?

Rating agencies charge investment banks to certify their bonds; because the banks are their clients, the agencies have a motive to overrate the banks’ products. Briefly describe a way that rating agencies could be organized so that their allegiance is with the investor and not the seller.

What does “shorting the market” mean?

Investor groups Scion and Cornwall begin the funding of their ventures with a particular source of seed money. What is the source, and would you use this source if you could? Explain briefly why or why not.

Stock and bond investing are sometimes compared to casino gambling. In what respect is this true, and why might it be inaccurate?