James Pressley, Bloomberg, March 3, 2010
Michael Burry, the California hedge-fund manager who figured
out how to bet against the subprime bubble, prodded seven Wall Street banks in
early 2005 to create credit-default swaps for subprime-mortgage bonds, Michael
Lewis writes in his book, “The Big Short.”
Five of them “had no idea what he was talking about,” Lewis
says. Only Deutsche Bank AG and Goldman Sachs Group Inc. expressed any
interest in the concept, he says.
“Inside of three years, credit-default swaps on subprime-
mortgage bonds would become a trillion-dollar market and precipitate hundreds
of billions of losses inside big Wall Street firms,” Lewis writes in an excerpt
from the book on the Web site of Vanity Fair magazine.
“Yet, when Michael Burry pestered the firms in the beginning
of 2005, only Deutsche Bank and Goldman Sachs had any real interest in
continuing the conversation. No one on Wall Street, as far as he could tell,
saw what he was seeing.”
The book is scheduled to be published later this month by
W.W. Norton in the U.S. and by Allen Lane in the U.K.
Burry, the head of Cupertino, California-based Scion Capital
Group LLC, had concluded that lending standards had hit bottom, Lewis writes.
He had studied subprime mortgage bonds in detail, wading through hundreds of
prospectuses, Lewis says, and had figured out that the way to bet against them
would be with credit-default swaps, which allow investors to insure against
–or bet on — the likelihood that the issuer will default.
At the time, there was no such thing for subprime mortgage
bonds, writes Lewis, a Bloomberg News columnist. So Burry had to get Wall
Street banks to create one.
First Deal
He did his first subprime-mortgage deals on May 19, 2005,
buying “$60 million of credit-default swaps from Deutsche Bank — $10 million
each on six different bonds,” Lewis writes.
As his bet against subprime mortgages grew, many of his
investors began to mistrust Burry and feel betrayed, Lewis says. Those who kept
their money with him were rewarded.
“By June 30, 2008, any investor who had stuck with Scion
Capital from its beginning, on November 1, 2000, had a gain, after fees and
expenses, of 489.34 percent,” Lewis writes. “Over the same period the
S&P 500 returned just a bit more than 2 percent.”
The Wall Street Job Report 