Why Small Banks Are In Big Trouble: As Hedge Funds Pile Into The New "Big Short", The Next 'Credit Event' Emerges

For those who have been trading long enough, every couple of years a new "big short" opportunity presents itself which makes a handful of investors extremely rich right before the Fed floods the system with liquidity and drowns all the bears for the next several years. And while all the trades are unique, they all share a common feature: they all have something to do with US real estate, whether residential or commercial.

The first "big short", as popularized by John Paulson, Michael Burry, Christian Bale and Brad Pitt was, of course, the RMBS short trade of 2007/2008 - immortalized in the movie by the same name - when buying ABX CDS (either RMBX or its cousing the CMBX) on various subprime residential and commercial mortgage backed securities generated huge profits for what was at the time an extremely convex trade. After all, none other than Ben Bernanke had just recently said that US real estate was not in a housing bubble and it had never before dropped in history. We all know what happened next.

The next big short, i.e., the "Big Short 2.0" which we first profiled six years ago in March of 2017, was a bet against securities backed by malls in weaker locations where stores could close in quick succession, triggering debt defaults. The trade, which many including Carl Icahn, had put on buy shorting the CMBX Series 6 (due to its substantial exposure to malls which were hurting long before the arrival of the pandemic) failed to move for years and then suddenly collapsed in the aftermath of the covid crash which shuttered the economy overnight and led to widespread defaults among malls (we discussed this in "The "Big Short 2" Hits An All Time Low As Commercial Real Estate Implodes"). End result: Carl Icahn made $1.3 billion, while other commercial real estate bears such as Daniel Mcnamara - then at MP Securitized Credit Partners - gained more than 110% (more on that below).