How Did Michael Burry Short the Housing Market and Cause the Crash

Michael Burry, a brilliant investor, made a bold bet against the housing market in the mid-2000s. He identified a pattern of reckless lending practices and unsustainable housing prices.

Burry's strategy involved shorting the housing market, which means he sold securities he didn't own, hoping to buy them back later at a lower price. This allowed him to profit from the expected decline in housing prices.

Burry's research revealed that many subprime borrowers were being given mortgages they couldn't afford. He noticed that these mortgages were being packaged into securities and sold to investors, who were unaware of the underlying risks.

By shorting these securities, Burry was essentially betting against the housing market's continued rise.

Michael Burry's Strategy was built on his conviction that the subprime housing bond market was extraordinarily overvalued. He was going to target this market because of his conviction that it was overvalued.

Burry had studied the underlying loans that made up the pool of mortgages being stuffed into the bonds, and he saw that borrowers with no income and no documentation were taking up a larger and larger share of the mortgages.

He realized that lending standards had collapsed in the face of the market's insatiable demand for subprime, as loan originators devised more and more elaborate means to justify loaning money to clearly un-creditworthy borrowers.

Burry knew he had to find a way to short these types of bonds, but their structure made them impossible to borrow, as the tranches were too small to individually identify.

He found a workaround in credit default swaps, which were insurance policies on bonds that would allow him to bet against the housing market – and win.

The housing market crash was a catastrophic event that left many people financially devastated. It was a direct result of the subprime mortgage bond market collapse.

Dr. Michael Burry saw it coming, and he was one of the few who took action to short the market. He studied the underlying loans that made up the pool of mortgages being stuffed into the bonds.

Burry's research revealed that borrowers with no income and no documentation were taking up a larger and larger share of the mortgages. This was a major red flag.

Lending standards had collapsed in the face of the market's insatiable demand for subprime. Loan originators were devising more and more elaborate means to justify loaning money to clearly un-creditworthy borrowers.

These loans were then being repackaged into bonds and sold off by the big banks. The market didn't have a mechanism for an investor like Burry to short these types of bonds.

However, Burry found a workaround by using credit default swaps, which are insurance policies on bonds. This allowed him to bet against the housing market and potentially win.

The housing market started to collapse in 2007 and 2008, and the payoff for those who had shorted the market was huge.

Michael Burry's story is a fascinating example of how a unique perspective and thorough analysis can lead to successful investing. He saw the subprime housing bond market as overvalued and decided to short it.

Burry's conviction was based on his study of the underlying loans that made up the pool of mortgages being stuffed into the bonds. He noticed that borrowers with no income and no documentation were taking up a larger and larger share of the mortgages.

To short the housing market, Burry used credit default swaps, which were insurance policies on bonds that allowed him to bet against the housing market. This was a workaround to the problem of the market not having a mechanism for shorting the subprime mortgage bond market.

The big ideas behind the big short include subprime mortgage bonds and credit default swaps as gameable markets. Wall Street firms exploited blind spots in the rating agencies' models and gamed the system to create pools of loans more likely to default but still receive high ratings.

Successful investing often comes from early identification of market risks or trends, as seen with Steve Eisman, Michael Burry, and Cornwall Capital's positions against subprime mortgage-backed securities. These investors' success stories demonstrate the value of having a unique perspective and thorough analysis.

Michael Burry's diagnosis with Asperger's syndrome may have given him an advantage in recognizing patterns and details that others missed. His unique thinking style allowed him to identify the risks in the subprime market before others did.

The government's intervention during the financial crisis through TARP and the Fed buying bad assets from banks prevented individual American subprime borrowers from failing but allowed Wall Street firms to avoid recognizing losses in their subprime mortgage portfolios. This created a false sense of security while masking underlying risks.

The credit default swaps market's crucial role in amplifying losses during the crisis highlights the importance of understanding the increasing complexity and interconnectedness of modern financial markets. This complexity can create a ripple effect of unknown amounts being bought and sold on every major firm.

Here are the key players in the big short: