I watched The Big Short a few years ago and since then I’ve rewatched it three times and read the book. It’s one of the most fascinating movies I’ve seen. Although I loved it the first time it’s not like I understood everything that was happening. Things were tied together and there were complex concepts explained there, but I found an explanation here which quite well describes the movie (and the events happening that are presented in the movie). The user has deleted their account so only the comment is left:

It’s really hard to ELI5 this but I’ll try. I didn’t feel like the other comments really explained the point of the movie.

The bankers wanted to make more money. So they started another industry altogether – gambling. They gambled on whether or not people would pay for their homes or stop paying and move out. The banks see that most people want to pay. The bankers figure out what percentage of people will stop paying. They begin to base their bets on this. They get really good at betting. Other people see they’re making a lot of money with this new “betting on the housing market” thing so they come along and start making more bets on whether or not the bankers will win. The home-owners keeps making their house payments, the bankers keep winning the bets, the people betting on the bankers keep winning their bets, and everyone is happy. For a few decades.

The banks learned that when people don’t buy as many houses, the bankers don’t make as much money because they can’t make new bets. So, they wanted to sell as many houses as possible, because then they’d make as much money as possible, betting on them.

So the banks changed the rules regarding who could buy a house. Before this change, you had to have a good job and good credit to get a loan to buy a house. After this change, anyone could get a house. No job, no income, no assets applicants (NINJA is their acronym/nickname) could get a house just because they wanted one. Obviously, these applicants have a higher default rate than applicants with good jobs and good credit. “Default” = stop paying and move out.

The banks kept betting on who will pay for their houses and who will stop paying and move out. BUT – and here’s the whole problem – they didn’t change their betting patterns at all. They still bet on the housing market as if everyone was going to keep paying and there would be no defaults. They bet so much and for so long that it created a situation where if even 8% of all the homeowners defaulted on their payments, they’d lose their gigantic bets on the market entirely. In other words, if on average just one person out of ten stopped paying and moved out of their homes, the banks would lose all the money they’d bet.

The guys from The Big Short came along and pointed out the obvious: “Well if you changed the rules about who could buy houses, then you should’ve seen that more people would default on their payments. So you should’ve changed how you bet on them. But you didn’t, because you were making so much money and didn’t see this problem. Now, you’re fucked because I’ve bet against you. In a couple of years, when all of those new, NINJA home-owners default on their payments, I’ll take a huge payoff from betting against you.”

And the banks didn’t see it or didn’t want to see it because they were being told that the party was over, they fucked up everything, and they wanted to just believe that they’d keep making money off these bets like they had for decades. They were wrong, and lost a ton of money. The guys from The Big Short were right, and made a ton of money.