Michael Lewis’s Vanity Fair article on Michael Burry of Scion Capital

This article is an excerpt of Michael Lewis’s new book The Big Short. It describes another of the few investors to successfully anticipate and short the sub-prime lending fiasco in the earlier parts of this decade. Michael Lewis does a great job of conveying who Burry really is as a person and what makes him tick. Similar to John Paulson, the famous fund manager who placed similar bets against MBS and made billions, Burry is an contrarian who sought out securities that would sky rocket in value if many people began to default on their mortgages. A medical school drop-out, with only one eye after a childhood bout with eye cancer, Burry learned he had Asperger’s Syndrome just as many of his investors began to question the wisdom of shorting the mortgage market and many Wall Street banks began calling him, trying to buy back the very securities they had happily sold him at fire-sale prices months earlier.

He also describes how Burry initially sought out credit default swaps against the worst tranches of sub-prime loans, only to discover that the major investment banks did not offer a CDS product that would serve that very purpose.

Really interesting.

Here’s a brief excerpt:

Once again they shocked and delighted him: Goldman Sachs e-mailed him a great long list of crappy mortgage bonds to choose from. “This was shocking to me, actually,” he says. “They were all priced according to the lowest rating from one of the big-three ratings agencies.” He could pick from the list without alerting them to the depth of his knowledge. It was as if you could buy flood insurance on the house in the valley for the same price as flood insurance on the house on the mountaintop.

The market made no sense, but that didn’t stop other Wall Street firms from jumping into it, in part because Mike Burry was pestering them. For weeks he hounded Bank of America until they agreed to sell him $5 million in credit-default swaps. Twenty minutes after they sent their e-mail confirming the trade, they received another back from Burry: “So can we do another?” In a few weeks Mike Burry bought several hundred million dollars in credit-default swaps from half a dozen banks, in chunks of $5 million. None of the sellers appeared to care very much which bonds they were insuring. He found one mortgage pool that was 100 percent floating-rate negative-amortizing mortgages—where the borrowers could choose the option of not paying any interest at all and simply accumulate a bigger and bigger debt until, presumably, they defaulted on it. Goldman Sachs not only sold him insurance on the pool but sent him a little note congratulating him on being the first person, on Wall Street or off, ever to buy insurance on that particular item. “I’m educating the experts here,” Burry crowed in an e-mail.

He wasn’t wasting a lot of time worrying about why these supposedly shrewd investment bankers were willing to sell him insurance so cheaply. He was worried that others would catch on and the opportunity would vanish. “I would play dumb quite a bit,” he said, “making it seem to them like I don’t really know what I’m doing. ‘How do you do this again?’ ‘Oh, where can I find that information?’ or ‘Really?’—when they tell me something really obvious.” It was one of the fringe benefits of living for so many years essentially alienated from the world around him: he could easily believe that he was right and the world was wrong.