Grace Kiser, Huffington Post
In his new book, “The Big Short” — excerpted in the latest Vanity Fair — Michael Lewis profiles the value investor who foresaw the mortgage meltdown and made a fortune betting on it.
Michael Burry, who dropped out of his first year of medical residency to start Scion Capital in 2000, had an unusual approach to investing from the beginning. He charged his investors a fee just enough to cover the fund’s expenses, and he made money only when investors’ capital grew. But it grew, quickly and drastically. Burry’s strategy — to spend long hours alone in his office obsessively studying prospectuses and carefully selecting stocks — led to spectacular results: by 2005, five years after Scion Capital launched, the fund was up 242 percent. (The stock-market index, by contrast, had declined 6.84 percent over the same period.)
But starting in 2004, Burry’s interest began to shift toward the subprime-mortgage bond market. He noticed that lenders were extending home loans to borrowers who had little or no collateral, usually at low teaser rates that would skyrocket after two years. Burry inferred that after the teaser rates expired, borrowers would default on their loans in waves and the value of securities that were made up of risky mortgage bundles would plummet. So he began purchasing credit-default swaps — essentially insurance — on certain subprime mortgage bonds:
“You didn’t buy insurance on the entire subprime-mortgage-bond market but on a particular bond, and Burry had devoted himself to finding exactly the right ones to bet against. He likely became the only investor to do the sort of old-fashioned bank credit analysis on the home loans that should have been done before they were made. He was the opposite of an old-fashioned banker, however. He was looking not for the best loans to make but the worst loans–so that he could bet against them.”
Unbeknownst to his investors, Burry continued to buy CDS, purchasing hundreds of millions of dollars worth, usually in small amounts.
Read more here: http://www.huffingtonpost.com/2010/03/02/michael-burry-the-unlikel_n_482712.html
