I Saw the Crisis Coming. Why Didn’t the Fed?
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PostPosted: Mon, Apr 12 2010, 8:55 am EDT    Post subject: I Saw the Crisis Coming. Why Didn’t the Fed? Reply with quote

Op-Ed Contributor

I Saw the Crisis Coming. Why Didn’t the Fed?

By MICHAEL J. BURRY

Published: April 3, 2010

Cupertino, Calif.

ALAN GREENSPAN, the former chairman of the Federal Reserve, proclaimed last month that no one could have predicted the housing bubble. “Everybody missed it,” he said, “academia, the Federal Reserve, all regulators.”

But that is not how I remember it. Back in 2005 and 2006, I argued as forcefully as I could, in letters to clients of my investment firm, Scion Capital, that the mortgage market would melt down in the second half of 2007, causing substantial damage to the economy. My prediction was based on my research into the residential mortgage market and mortgage-backed securities. After studying the regulatory filings related to those securities, I waited for the lenders to offer the most risky mortgages conceivable to the least qualified buyers. I knew that would mark the beginning of the end of the housing bubble; it would mean that prices had risen — with the expansion of easy mortgage lending — as high as they could go.

I had begun to worry about the housing market back in 2003, when lenders first resurrected interest-only mortgages, loosening their credit standards to generate a greater volume of loans. Throughout 2004, I had watched as these mortgages were offered to more and more subprime borrowers — those with the weakest credit. The lenders generally then sold these risky loans to Wall Street to be packaged into mortgage-backed securities, thus passing along most of the risk. Increasingly, lenders concerned themselves more with the quantity of mortgages they sold than with their quality.

Meanwhile, home buyers, convinced by recent history that real estate prices would always rise, readily signed onto whatever mortgage would get them the biggest house. The incentive for fraud was great: the F.B.I. reported that its mortgage fraud caseload increased fivefold from 2001 to 2004.

At the same time, I also watched how ratings agencies vouched for subprime mortgage-backed securities. To me, these agencies seemed not to be paying much attention.

By mid-2005, I had so much confidence in my analysis that I staked my reputation on it. That is, I purchased credit default swaps — a type of insurance — on billions of dollars worth of both subprime mortgage-backed securities and the bonds of many of the financial companies that would be devastated when the real estate bubble burst. As the value of the bonds fell, the value of the credit default swaps would rise. Our swaps covered many of the firms that failed or nearly failed, including the insurer American International Group and the mortgage lenders Fannie Mae and Freddie Mac.

I entered these trades carefully. Suspecting that my Wall Street counterparties might not be able or willing to pay up when the time came, I used six counterparties to minimize my exposure to any one of them. I also specifically avoided using Lehman Brothers and Bear Stearns as counterparties, as I viewed both to be mortally exposed to the crisis I foresaw.

What’s more, I demanded daily collateral settlement — if positions moved in our favor, I wanted cash posted to our account the next day. This was something I knew that Goldman Sachs and other derivatives dealers did not demand of AAA-rated A.I.G.

I believed that the collapse of the subprime mortgage market would ultimately lead to huge failures among the largest financial institutions. But at the time almost no one else thought these trades would work out in my favor.

During 2007, under constant pressure from my investors, I liquidated most of our credit default swaps at a substantial profit. By early 2008, I feared the effects of government intervention and exited all our remaining credit default positions — by auctioning them to the many Wall Street banks that were themselves by then desperate to buy protection against default. This was well in advance of the government bailouts. Because I had been operating in the face of strong opposition from both my investors and the Wall Street community, it took everything I had to see these trades through to completion. Disheartened on many fronts, I shut down Scion Capital in 2008.
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http://www.nytimes.com/2010/04/04/opinion/04burry.html
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PostPosted: Mon, Apr 12 2010, 9:20 am EDT    Post subject: Re: I Saw the Crisis Coming. Why Didn’t the Fed? Reply with quote

These kinds of things always make me laugh. I hope no one takes them seriously.

The reality is on any given year during the entire boom period, any boom period, some small minority of people are passionately arguing (and in some cases trading) that it is about to bust. Similarly, during busts some people are passionately arguing(and trading) that its about to take off and boom again. There is an absolute certainly that sooner or later some of them are going to be right and get wild profits from it.

What the story leaves out is how many others end up being forgotten or losing substantial money from having guessed the timing wrong. Anyone can look like a profit if they are only held accountable for their correct guesses and not all their guesses. In fact, Mr. Burry's Hedge Fund suffered a major shareholder revolt before the mortgage securities market collapse because he had been shorting the market for two years as it continued to soar before it finally crashed. That’s two years of profits he could have had on the way up before he profited on the downside, and along the way even a majority of his own investors doubted his prediction. So to suggest that “anyone” should have seen it ignores even his own situation.

Which is not to say that many people, including the Fed, didn’t see that there was a bubble in real estate. Mr. Greenspan actually warned of that repeatedly while still Chairman of the Fed. And many, many of us saw it as an inevitable cycle in need of an eventual correction. What no one could predict was the timing, speed or severity. And that’s all that matters. Just like it is inevitable now that the stock market will eventually have another correction, that real estate has not really finished correcting yet, etc. These are pretty much facts. But knowing that and knowing exactly when and how, let alone how to regulate against them are wildly different things.

His op ed is just a fancy sales tool for himself. Nothing more, nothing less.
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PostPosted: Mon, Apr 12 2010, 7:10 pm EDT    Post subject: Re: I Saw the Crisis Coming. Why Didn’t the Fed? Reply with quote

"His op ed is just a fancy sales tool for himself. Nothing more, nothing less."

Did you actually read the whole article? He closed his wildly successful hedge fund in 2008. What is he trying to sell?
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PostPosted: Mon, Apr 12 2010, 10:57 pm EDT    Post subject: Re: I Saw the Crisis Coming. Why Didn’t the Fed? Reply with quote

Guest wrote:
"His op ed is just a fancy sales tool for himself. Nothing more, nothing less."

Did you actually read the whole article? He closed his wildly successful hedge fund in 2008. What is he trying to sell?


Are you kidding? He didn't exactly retire. Most hedge fund managers are serial investor/managers. He wrote a book promoting himself too.

Until his right bet his fund was doing so well that he was almost forced to close from a shareholder revolt.

Good for him, he made a great bet. He made about $100 million from it. It's just silly and self serving for him to suggest it was this obvious fact that everyone should have seen coming. Yeah, we all did. I can predict with a certainty that it will rain again. I just can't tell you when or how many inches. But if I guess it will rain tomorrow and rain one inch, eventually I'll be more or less right.
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PostPosted: Tue, Apr 13 2010, 7:54 am EDT    Post subject: Re: I Saw the Crisis Coming. Why Didn’t the Fed? Reply with quote

Guest wrote:
Guest wrote:
"His op ed is just a fancy sales tool for himself. Nothing more, nothing less."

Did you actually read the whole article? He closed his wildly successful hedge fund in 2008. What is he trying to sell?


Are you kidding? He didn't exactly retire. Most hedge fund managers are serial investor/managers. He wrote a book promoting himself too.
...


So you can predict what he plans to do in the future? He manages his own money now. This guy has no problem attracting investors' money.

Nope, he did not write a book to promote himself (I think you don't know him well, Google him for more info). His story is featured in the following two books:

The Big Short by Michael Lewis
The Greatest Trade Ever by Gregory Zuckerman
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