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Michael Burry – Part 3

Michael Burry
3 minute read

Here we have Scion, piloted by Burry, full of CDSs. To him they are precious as gold, but this gold is on a ship and the seas are choppy. Michael Burry is a true captain though, only the port in his sights.


He even tried to take this strategy to a new level by opening a second fund that was only devoted to CDSs. It could take this bet into the billions of dollars. He called this second fund Milton’s Opus, after Paradise Lost. This — again — was lost on people. People didn’t invest in this second fund, and for that matter did not even understand the name.


On top of this, people found it difficult to understand why firms such as Goldman Sachs would even sell these CDSs in the first place if they were such a good buy. People could not understand that Burry was ahead of the game in seeing the value here. This was reflected in June 2005, when Goldman Sachs asking Burry if he wanted to increase the size of his trade to $100 million.


In October 2005, Michael had officially told all of his investors what he was doing (not that it was much of a secret). Within a few weeks everything started to bust wide open. People started asking Goldman Sachs how to short housing, like Scion did.

The tide had turned fully when Deutsche Bank got in contact with Scion. They had broken ties with him due to his aggression in buying swaps, and now they wanted to buy back the first 6 swaps he had bought from them. He did sell them back, for a profit. They immediately asked for more, and were even willing to take the full billion of CDSs he had.


Goldman Sachs was next to call Burry, asking to buy some of his CDSs as well. To test the waters, Burry called Bank of America to see if he could buy some more. They were not selling. Like the others they only wanted to buy.


The market had flipped. Common perception was moving in Burry’s direction. Now all he had to do was wait for the inevitable avalanche of money.


By early 2007 the predictions were becoming facts. The subprime mortgages were coming out of their “teaser rates”. Teaser rates were low payments early in the mortgage that later skyrocketed, causing many defaults. At the same time, Burry was struggling. To maintain his position he let go of some of his staff and a fraction of his positions. This is significant because these CDSs are becoming sure fire wins, so having to sell them in the market eats up the gains that would have come when they paid off.


By mid 2007, Bear Stearns and Goldman Sachs were falling apart in front of everyone. When Burry contacted firms he was trading with, suddenly people were out sick, or they came up with  other excuses, such as power failures. By late June they were conferring with Burry to correctly mark the value of these CDS, since their reports had been underestimating them more and more each month.


By July’s end, reports were popular about those who saw the subprime crash coming. This included Greg Lippmann, a trader from Deutsche Bank.  He was the trader who had re-initiated contact with Burry. He had copied Burry’s plan and gotten money and fame from doing so. Burry’s name was not heard.


Despite not getting fame for his visionary trading, Burry still did very well. By the end of this long journey, Burry had made about $100 million for himself. Even more impressive is what he made for his clients, $725 million. Removing fees and expenses, a client who stayed with Scion the whole time made around a 500% return on their money.


The one sour note that came with this was the lack of anyone thanking Burry or apologizing for all the doubt they had shown him. No wonder Mr. Burry didn’t like people.


He did end up gaining his fame after all, though. Michael Lewis wrote a book about the subprime bubble in 2013 called The Big Short. It was turned into a movie in 2015, and Michael Burry was portrayed by Christian Bale.


The moral of the story? Stick to your principles, and you too can be Batman. Or at least you can have a slice of Bruce Wayne’s money.

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