In the movie The Big Short, do the investors purchase the mortgage bonds from the banks and then have them insured with credit default swaps? Or did they just purchase the credit default swaps without owning owning the bonds?
In the beginning of the movie, Dr. Burry walks into the bank and wants to buy credit default swaps on the banks mortgage bonds. I'm trying to understand the process. Dr. Burry states he wants to purchase 100 million in default swaps at the first bank for example. I understood the transaction like this:
He pays 100 million up front for mortgage bonds, and has them insured by paying additional fees if the bonds increase in value over time.
I became confused with the process when Dr. Burry stated he wanted to buy "Credit Default Swaps on the Mortgage Bonds." Wouldn't he need to purchase ownership of the bonds before he could have them insured? Or do credit default swaps work in a way where you can bet against these bonds without having to take ownership of them and just pay the premium fees, which is whatever the bank charges?
Please explain Dr. Burry's 1.3 billion short position. Did he pay all of that at once, or is that the amount over time he'll pay on the premium fees? Or is it the amount he paid for the mortgage bonds all together which doesn't count the premium fees that will be paid down the line?
