Our story: Vennett

Vennett comes from that story. Here is who he is, what he did, and why we kept his name without building him a monument.

What happened

Before the crisis, banks bought mortgages by the bucketload, bundled them into bonds and sold them in packages. Those packages were called CDOs, or "collateralized debt obligations." Think of a layered cake: the top layers get paid first and carry the highest rating, while the bottom layers get paid last and absorb the defaults. Many of those layers, the top ones included, got an AAA rating from the rating agencies, the highest grade there is. A 10 from a teacher who never read the exam.

Everything held up as long as house prices kept rising. When they stopped, the loans started failing. In 2010, about 1.2 million homes in the United States ended up in the hands of banks. An absolute outrage.

Who is Vennett

In The Big Short (La gran apuesta in Spain), directed by Adam McKay and based on Michael Lewis's 2010 book, Vennett is the guy who sees it coming and explains it to the audience, looking straight into the camera. Ryan Gosling plays him, with more charm than scruples.

According to what has been reported, the character is inspired by Greg Lippmann, a real trader who worked at Deutsche Bank.

How to bet against mortgages

Enter the CDS, or credit default swap. It sounds like alphabet soup, and it's simpler than it looks. It's a contract that protects you if a bond doesn't get paid. You pay a premium every year, like an insurance policy. If the bond collapses, you collect. If it doesn't, you lose what you've paid.

To see it clearly, imagine you don't own a house, but you pay for fire insurance on your neighbor's place. If it burns, you collect. Real insurance won't let you do that, because you have to have something to lose. CDS do. This explains why so many people were betting that houses would fall without owning a single one.

Vennett sells that protection to the funds betting against those bonds. And according to a 2011 report from the US Senate, which includes a case study on Deutsche Bank, the bank itself was also betting against the products it was selling to its clients.

Where we come in

What interests us in this story isn't the money, it's the label. In 2008, the AAA rating hid what was inside the package. A league can do the same: if it only shows the one test that worked, it's just a pretty label. That's why our rule is to show the strategies that don't work too.

We're much smaller. Nobody bets real money here, and nobody profits from someone else's misfortune. What we do want is what was missing in 2008: the idea written down as rules, what's inside in plain sight, and the S&P 500, the index of the 500 largest US companies, to deliver the verdict.

What is Vennett today?

Vennett is a strategy league with no real money. You write your idea in your own words, and the app turns it into rules you can review. Each strategy picks 3, 5, 7 or 10 companies out of thousands. Every Friday at 6 p.m. New York time, the portfolio is compared against the S&P 500.

It's completely free. We're in pre-season, and the first season starts in January. We're still a small group with no results to brag about. If after a year it hasn't been worth anything, you'll still see which of the house strategies worked (and which didn't).

Create your strategy for free at vennett.app. No card needed. This is not financial advice.