In the Land of the Blind

Writing a check separates a commitment from a conversation.
--Warren Buffett

In early 2004 another stock market investor, Michael Burry, immersed himself for the first time in the bond market. He learned all he could about how money got borrowed and lent in America. He didn't talk to anyone about what became his new obsession; he just sat alone in his office, in San Jose, California, and read books and articles and financial filings. He wanted to know, especially, how subprime mortgage bonds worked. A giant number of individual loans got piled up into a tower. The top floors got their money back first and so got the highest ratings from Moody's and S&P and the lowest interest rate. The low floors got their money back last, suffered the first losses, and got the lowest ratings from Moody's and S&P. Because they were taking on more risk, the investors in the bottom floors received a higher rate of interest than investors in the top floors. Investors who bought mortgage bonds had to decide in which floor of the tower they wanted to invest, but Michael Burry wasn't thinking about buying mortgage bonds. He was wondering how he might short subprime mortgage bonds.

Every mortgage bond came with its own mind-numbingly tedious 130-page prospectus. If you read the fine print, you saw that each was its own little corporation. Burry spent the end of 2004 and early 2005 scanning hundreds and actually reading dozens of them, certain he was the only one apart from the lawyers who drafted them to do so--even though you could get them all for $100 a year from 10K Wizard.com. As he explained in an e-mail:

So you take something like NovaStar, which was an originate and sell subprime mortgage lender, an archetype at the time. The names [of the bonds] would be NHEL 2004-1, NHEL 2004-2, NHEL 2004-3, NHEL 2005-1, etc. NHEL 2004-1 would for instance contain loans from the first few months of 2004 and the last few months of 2003, and 2004-2 would have loans from the middle part, and 2004-3 would get the latter part of 2004. You could pull these prospectuses, and just quickly check the pulse of what was happening in the subprime mortgage portion of the originate-and-sell industry. And you'd see that 2/28 interest only ARM mortgages were only 5.85% of the pool in early 2004, but by late 2004 they were 17.48% of the pool, and by late summer 2005 25.34% of the pool. Yet average FICO [consumer credit] scores for the pool, percent of no-doc ["Liar"] loan to value measures and other indicators were pretty static.... The point is that these measures could stay roughly static, but the overall pool of mortgages being issued, packaged and sold off was worsening in quality, because for the same average FICO scores or the same average loan to value, you were getting a higher percentage of interest only mortgages.

As early as 2004, if you looked at the numbers, you could clearly see the decline in lending standards. In Burry's view, standards had not just fallen but hit bottom. The bottom even had a name: the interest-only negative-amortizing adjustable-rate subprime mortgage. You, the home buyer, actually were given the option of paying nothing at all, and rolling whatever interest you owed the bank into a higher principal balance. It wasn't hard to see what sort of person might like to have such a loan: one with no income. What Burry couldn't understand was why a person who lent money would want to extend such a loan. "What you want to watch are the lenders, not the borrowers," he said. "The borrowers will always be willing to take a great deal for themselves. It's up to the lenders to show restraint, and when they lose it, watch out." By 2003 he knew that the borrowers had already lost it. By early 2005 he saw that lenders had, too.

A lot of hedge fund managers spent time chitchatting with their investors and treated their quarterly letters to them as a formality. Burry disliked talking to people face-to-face and thought of these letters as the single most important thing he did to let his investors know what he was up to. In his quarterly letters he coined a phrase to describe what he thought was happening: "the extension of credit by instrument." That is, a lot of people couldn't actually afford to pay their mortgages the old-fashioned way, and so the lenders were dreaming up new instruments to justify handing them new money. "It was a clear sign that lenders had lost it, constantly degrading their own standards to grow loan volumes," Burry said. He could see why they were doing this: They didn't keep the loans but sold them to Goldman Sachs and Morgan Stanley and Wells Fargo and the rest, which packaged them into bonds and sold them off. The end buyers of subprime mortgage, he assumed, were just "dumb money." He'd study up on them, too, but later.

He now had a tactical investment problem. The various floors, or tranches, of subprime mortgage bonds all had one thing in common: The bonds were impossible to sell short. To sell a stock or bond short, you needed to borrow it, and these tranches of mortgage bonds were tiny and impossible to find. You could buy them or not buy them, but you couldn't bet explicitly against them; the market for subprime mortgages simply had no place for people in it who took a dim view of them. You might know with certainty that the entire subprime mortgage bond market was doomed, but you could do nothing about it. You couldn't short houses. You could short the stocks of home building companies--Pulte Homes, say, or Toll Brothers--but that was expensive, indirect, and dangerous. Stock prices could rise for a lot longer than Burry could stay solvent.

A couple of years earlier, he'd discovered credit default swaps. A credit default swap was confusing mainly because it wasn't really a swap at all. It was an insurance policy, typically on a corporate bond, with semiannual premium payments and a fixed term. For instance, you might pay $200,000 a year to buy a ten-year credit default swap on $100 million in General Electric bonds. The most you could lose was $2 million: $200,000 a year for ten years. The most you could make was $100 million, if General Electric defaulted on its debt any time in the next ten years and bondholders recovered nothing. It was a zero-sum bet: If you made $100 million, the guy who had sold you the credit default swap lost $100 million. It was also an asymmetric bet, like laying down money on a number in roulette. The most you could lose were the chips you put on the table; but if your number came up you made thirty, forty, even fifty times your money. "Credit default swaps remedied the problem of open-ended risk for me," said Burry. "If I bought a credit default swap, my downside was defined and certain, and the upside was many multiples of it."

He was already in the market for corporate credit default swaps. In 2004 he began to buy insurance on companies he thought might suffer in a real estate downturn: mortgage lenders, mortgage insurers, and so on. This wasn't entirely satisfying. A real estate market meltdown might cause these companies to lose money; there was no guarantee that they would actually go bankrupt. He wanted a more direct tool for betting against subprime mortgage lending. On March 19, 2005, alone in his office with the door closed and the shades drawn, reading an abstruse textbook on credit derivatives, Michael Burry got an idea: credit default swaps on subprime mortgage bonds.

The idea hit him as he read a book about the evolution of the U.S. bond market and the creation, in the mid-1990s, at J.P. Morgan, of the first corporate credit default swaps. He came to a passage explaining why banks felt they needed credit default swaps at all. It wasn't immediately obvious--after all, the best way to avoid the risk of General Electric's defaulting on its debt was not to lend to General Electric in the first place. In the beginning, credit default swaps had been a tool for hedging: Some bank had loaned more than they wanted to General Electric because GE had asked for it, and they feared alienating a long-standing client; another bank changed its mind about the wisdom of lending to GE at all. Very quickly, however, the new derivatives became tools for speculation: A lot of people wanted to make bets on the likelihood of GE's defaulting. It struck Burry: Wall Street is bound to do the same thing with subprime mortgage bonds, too. Given what was happening in the real estate market--and given what subprime mortgage lenders were doing--a lot of smart people eventually were going to want to make side bets on subprime mortgage bonds. And the only way to do it would be to buy a credit default swap.

The credit default swap would solve the single biggest problem with Mike Burry's big idea: timing. The subprime mortgage loans being made in early 2005 were, he felt, almost certain to go bad. But as their interest rates were set artificially low, and didn't reset for two years, it would be two years before that happened. Subprime mortgages almost always bore floating interest rates, but most of them came with a fixed, two-year "teaser" rate. A mortgage created in early 2005 might have a two-year "fixed" rate of 6 percent that, in 2007, would jump to 11 percent and provoke a wave of defaults. The faint ticking sound of these loans would grow louder with time, until eventually a lot of people would suspect, as he suspected, that they were bombs. Once that happened, no one would be willing to sell insurance on subprime mortgage bonds. He needed to lay his chips on the table now and wait for the casino to wake up and change the odds of the game. A credit default swap on a thirty-year subprime mortgage bond was a bet designed to last for thirty years, in theory. He figured that it would take only three to pay it off.

The only problem was that there was no such thing as a credit default swap on a subprime mortgage bond, not that he could see. He'd need to prod the big Wall Street firms to create them. But which firms? If he was right and the housing market crashed, these firms in the middle of the market were sure to lose a lot of money. There was no point buying insurance from a bank that went out of business the minute the insurance became valuable. He didn't even bother calling Bear Stearns and Lehman Brothers, as they were more exposed to the mortgage bond market than the other firms. Goldman Sachs, Morgan Stanley, Deutsche Bank, Bank of America, UBS, Merrill Lynch, and Citigroup were, to his mind, the most likely to survive a crash. He called them all. Five of them had no idea what he was talking about; two came back and said that, while the market didn't exist, it might one day. Inside of three years, credit default swaps on subprime mortgage bonds would become a trillion-dollar market and precipitate hundreds of billions of dollars' worth of losses inside big Wall Street firms. 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.

He sensed that he was different from other people before he understood why. When he was two years old he'd developed a rare form of cancer, and the operation to remove the tumor had cost him his left eye. A boy with one eye sees the world differently than everyone else, but it didn't take long for Mike Burry to see his literal distinction in more figurative terms. Grown-ups were forever insisting that he should look other people in the eye, especially when he was talking to them. "It took all my energy to look someone in the eye," he said. "If I am looking at you, that's the one time I know I won't be listening to you." His left eye didn't line up with whomever he was trying to talk to; when he was in social situations trying to make chitchat, the person to whom he was speaking would steadily drift left. "I don't really know how to stop it," he said, "so people just keep moving left until they're standing way to my left, and I'm trying not to turn my head anymore. I end up facing right and looking left with my good eye, through my nose."

His glass eye, he assumed, was the reason that face-to-face interaction with other people almost always ended badly for him. He found it maddeningly difficult to read people's nonverbal signals; and their verbal signals he often took more literally than they meant them. When trying his best he was often at his worst. "My compliments tended not to come out right," he said. "I learned early that if you compliment somebody it'll come out wrong. For your size, you look good. That's a really nice dress: It looks homemade. The glass eye became his private explanation for why he hadn't really fit in with groups. The eye oozed and wept and required constant attention. It wasn't the sort of thing other kids ever allowed him to be unselfconscious about. They called him cross-eyed, even thought he wasn't. Every year they begged him to pop his eye out of its socket--but when he complied, it became infected and disgusting and a cause of further ostracism.

In his glass eye he found the explanation for other traits peculiar to himself. His obsession with fairness, for example. When he noticed that pro basketball stars were far less likely to be called for traveling than lesser players, he didn't just holler at the refs. He stopped watching basketball altogether; the injustice of it killed his interest in the sport. Even though he was ferociously competitive, well built, physically brave, and a good athlete, he didn't care for team sports. The eye helped to explain this, as most team sports were ball sports, and a boy with poor depth perception and limited peripheral vision couldn't very well play ball sports. He tried hard at the less ball-centric positions in football, but his eye popped out if he hit someone too hard.

Again, it was hard for him to see where his physical limitations ended and his psychological ones began--he assumed the glass eye was at the bottom of both. He couldn't stand the unfairness of coaches who favored their own kids. Umpires who missed calls drove him to distraction. He preferred swimming, as it required virtually no social interaction. No teammates. No ambiguity. You just swam your time and you won or you lost.

After a while even he ceased to find it surprising that he spent most of his time alone. By his late twenties he thought of himself as the sort of person who didn't have friends. He'd gone through Santa Teresa High School in San Jose, UCLA, and Vanderbilt University School of Medicine and created not a single lasting bond. What friendships he did have were formed and nurtured in writing, by e-mail; the two people he considered to be true friends he had known for a combined twenty years but had met in person a grand total of eight times. "My nature is not to have friends," he said. "I'm happy in my own head." Somehow he'd married twice. His first wife was a woman of Korean descent who wound up living in a different city ("she often complained that I appeared to like the idea of a relationship more than living the actual relationship") and his second, to whom he was still married, was a Vietnamese-American woman he'd met on Match.com. In his Match.com profile, he described himself frankly as "a medical student with only one eye, an awkward social manner, and $145,000 in student loans." His obsession with personal honesty was a cousin to his obsession with fairness.

Obsessiveness--that was another trait he came to think of as peculiar to himself. His mind had no temperate zone: He was either possessed by a subject or not interested in it at all. There was an obvious downside to this quality--he had more trouble than most faking interest in other people's concerns and hobbies, for instance--but an upside, too. Even as a small child he had a fantastic ability to focus and learn, with or without teachers. When it synced with his interests, school came easy for him--so easy that, as an undergraduate at UCLA, he could flip back and forth between English and economics and pick up enough premedical training on the side to get himself admitted to the best medical schools in the country. He attributed his unusual powers of concentration to his lack of interest in human interaction, and his lack of interest in human interaction...well, he was able to argue that basically everything that happened was caused, one way or the other, by his fake left eye.

This ability to work and to focus set him apart even from other medical students. In 1998, as a resident in neurology at Stanford Hospital, he mentioned to his superiors that, between fourteen-hour hospital shifts, he had stayed up two nights in a row taking apart and putting back together his personal computer in an attempt to make it run faster. His superiors sent him to a psychiatrist, who diagnosed Mike Burry as bipolar. He knew instantly he'd been misdiagnosed: How could you be bipolar if you were never depressed? Or, rather, if you were only depressed while doing your rounds and pretending to be interested in practicing, as opposed to studying, medicine? He'd become a doctor not because he enjoyed medicine but because he didn't find medical school terribly difficult. The actual practice of medicine, on the other hand, either bored or disgusted him. Of his first brush with gross anatomy: "One scene with people carrying legs over their shoulders to the sink to wash out the feces just turned my stomach, and I was done." Of his feeling about the patients: "I wanted to help people--but not really."

He was genuinely interested in computers, not for their own sake but for their service to a lifelong obsession: the inner workings of the stock market. Ever since grade school, when his father had shown him the stock tables at the back of the newspaper and told him that the stock market was a crooked place and never to be trusted, let alone invested in, the subject had fascinated him. Even as a kid he had wanted to impose logic on this world of numbers. He began to read about the market as a hobby. Pretty quickly he saw that there was no logic at all in the charts and graphs and waves and the endless chatter of many self-advertised market pros. Then along came the dot-com bubble and suddenly the entire stock market made no sense at all. "The late nineties almost forced me to identify myself as a value investor, because I thought what everybody else was doing was insane," he said. Formalized as an approach to financial markets during the Great Depression by Benjamin Graham, "value investing" required a tireless search for companies so unfashionable or misunderstood that they could be bought for less than their liquidation value. In its simplest form value investing was a formula, but it had morphed into other things--one of them was whatever Warren Buffett, Benjamin Graham's student, and the most famous value investor, happened to be doing with his money.

Burry did not think investing could be reduced to a formula or learned from any one role model. The more he studied Buffett, the less he thought Buffett could be copied; indeed, the lesson of Buffett was: To succeed in a spectacular fashion you had to be spectacularly unusual. "If you are going to be a great investor, you have to fit the style to who you are," Burry said. "At one point I recognized that Warren Buffett, though he had every advantage in learning from Ben Graham, did not copy Ben Graham, but rather set out on his own path, and ran money his way, by his own rules.... I also immediately internalized the idea that no school could teach someone how to be a great investor. If it were true, it'd be the most popular school in the world, with an impossibly high tuition. So it must not be true."

Investing was something you had to learn how to do on your own, in your own peculiar way. Burry had no real money to invest, but he nevertheless dragged his obsession along with him through high school, college, and medical school. He'd reached Stanford Hospital without ever taking a class in finance or accounting, let alone working for any Wall Street firm. He had maybe $40,000 in cash, against $145,000 in student loans. He had spent the previous four years working medical student hours. Nevertheless, he had found time to make himself a financial expert of sorts. "Time is a variable continuum," he wrote to one of his e-mail friends, one Sunday morning in 1999:

An afternoon can fly by or it can take 5 hours. Like you probably do, I productively fill the gaps that most people leave as dead time. My drive to be productive probably cost me my first marriage and a few days ago almost cost me my fiancee. Before I went to college the military had this "we do more before 9am than most people do all day" and I used to think and I do more than the military. As you know there are some select people that just find a drive in certain activities that supersedes EVERYTHING else.

He wasn't bipolar. He was merely isolated and apart, without actually feeling lonely or deeply unhappy. He didn't regard himself as a tragedy; he thought, among other things, that his unusual personality enabled him to concentrate better than other people. All of it followed, in his mind, from the warping effects of his fake eye. "That's why I thought people thought I was different," he said. "That's why I thought I was different." Thinking himself different, he didn't find what happened to him when he collided with Wall Street nearly as bizarre as it was.

Late one night in November 1996, while on a cardiology rotation at St. Thomas Hospital, in Nashville, Tennessee, he logged on to a hospital computer and went to a message board called techstocks.com. There he created a thread called value investing. Having read everything there was to read about investing, he decided to learn a bit more about "investing in the real world." A mania for Internet stocks gripped the market. A site for the Silicon Valley investor, circa 1996, was not a natural home for a sober-minded value investor. Still, many came, all with opinions. A few people grumbled about the very idea of a doctor having anything useful to say about investments, but over time he came to dominate the discussion. Dr. Mike Burry--as he always signed himself--sensed that other people on the thread were taking his advice and making money with it.

Once he figured out he had nothing more to learn from the crowd on his thread, he quit it to create what later would be called a blog but at the time was just a weird form of communication. He was working sixteen-hour shifts at the hospital, confining his blogging mainly to the hours between midnight and three in the morning. On his blog he posted his stock market trades and his arguments for making the trades. People found him. As a money manager at a big Philadelphia value fund said, "The first thing I wondered was, When is he doing this? The guy was a medical intern. I only saw the nonmedical part of his day, and it was simply awesome. He's showing people his trades. And people are following it in real time. He's doing value investing--in the middle of the dot-com bubble. He's buying value stocks, which is what we're doing. But we're losing money. We're losing clients. All of a sudden he goes on this tear. He's up fifty percent. It's uncanny. He's uncanny. And we're not the only ones watching it."

Mike Burry couldn't see exactly who was following his financial moves, but he could tell which domains they came from. In the beginning his readers came from EarthLink and AOL. Just random individuals. Pretty soon, however, they weren't. People were coming to his site from mutual funds like Fidelity and big Wall Street investment banks like Morgan Stanley. One day he lit into Vanguard's index funds and almost instantly received a cease and desist order from Vanguard's attorneys. Burry suspected that serious investors might even be acting on his blog posts, but he had no clear idea who they might be. "The market found him," says the Philadelphia mutual fund manager. "He was recognizing patterns no one else was seeing."

By the time Burry moved to Stanford Hospital in 1998 to take up his residency in neurology, the work he had done between midnight and three in the morning had made him a minor but meaningful hub in the land of value investing. By this time the craze for Internet stocks was completely out of control and had infected the Stanford University medical community. "The residents in particular, and some of the faculty, were captivated by the dot-com bubble," said Burry. "A decent minority of them were buying and discussing everything--Polycom, Corel, Razorfish, Pets.com, TIBCO, Microsoft, Dell, Intel are the ones I specifically remember, but areyoukiddingme-dot-com was how my brain filtered a lot of it.... I would just keep my mouth shut, because I didn't want anybody there knowing what I was doing on the side. I felt I could get in big trouble if the doctors there saw I wasn't one hundred and ten percent committed to medicine."

People who worry about seeming sufficiently committed to medicine probably aren't sufficiently committed to medicine. The deeper he got into his medical career, the more Burry felt constrained by his problems with other people in the flesh. He briefly tried to hide in pathology, where the people had the decency to be dead, but that didn't work. ("Dead people, dead parts. More dead people, more dead parts. I thought, I want something more cerebral.")

He'd moved back to San Jose, buried his father, remarried, and been misdiagnosed by experts as bipolar when he shut down his Web site and announced he was quitting neurology to become a money manager. The chairman of the Stanford Department of Neurology thought he'd lost his mind and told him to take a year to think it over, but he'd already thought it over. "I found it fascinating and seemingly true," he said, "that if I could run a portfolio well, then I could achieve success in life, and that it wouldn't matter what kind of person I was perceived to be, even though I felt I was a good person deep down." His $40,000 in assets against $145,000 in student loans posed the question of exactly what portfolio he would run. His father had died after another misdiagnosis: A doctor had failed to spot the cancer on an X-ray, and the family had received a small settlement. The father disapproved of the stock market, but the payout from his death funded his son into it. His mother was able to kick in $20,000 from her settlement, his three brothers kicked in $10,000 each of theirs. With that, Dr. Michael Burry opened Scion Capital. (As a boy he'd loved the book The Scions of Shannara.) He created a grandiose memo to lure people not related to him by blood. "The minimum net worth for investors should be $15 million," it said, which was interesting, as it excluded not only himself but basically everyone he'd ever known.

As he scrambled to find office space, buy furniture, and open a brokerage account, he received a pair of surprising phone calls. The first came from a big investment fund in New York City, Gotham Capital. Gotham was founded by a value investment guru named Joel Greenblatt. Burry had read Greenblatt's book You Can Be a Stock Market Genius. ("I hated the title but liked the book.") Greenblatt's people told him that they had been making money off his ideas for some time and wanted to continue to do so--might Mike Burry consider allowing Gotham to invest in his fund? "Joel Greenblatt himself called and said, 'I've been waiting for you to leave medicine.'" Gotham flew Burry and his wife to New York--and it was the first time Michael Burry had flown to New York or flown first-class--and put him up in a suite at the Intercontinental Hotel.

On his way to his meeting with Greenblatt, Burry was wracked with the anxiety that always plagued him before face-to-face encounters with people. He took some comfort in the fact that the Gotham people seemed to have read so much of what he had written. "If you read what I wrote first, and then meet me, the meeting goes fine," he said. "People who meet me who haven't read what I wrote--it almost never goes well. Even in high school it was like that--even with teachers." He was a walking blind taste test: You had to decide if you approved of him before you laid eyes on him. In this case he was at a serious disadvantage, as he had no clue how big-time money managers dressed. "He calls me the day before the meeting," says one of his e-mail friends, himself a professional money manager. "And he asks, 'What should I wear?' He didn't own a tie. He had one blue sports coat, for funerals." This was another quirk of Mike Burry's. In writing he presented himself formally, even a bit stuffily, but he dressed for the beach. Walking to Gotham's office, he panicked and ducked into a Tie Rack and bought a tie.

He arrived at the big New York money management firm as formally attired as he had ever been in his entire life to find its partners in t-shirts and sweatpants. The exchange went something like this.

"We'd like to give you a million dollars."

"Excuse me?"

"We want to buy a quarter of your new hedge fund. For a million dollars."

"You do?"

"Yes. We're offering a million dollars."

"After tax!"

Somehow Burry had it in his mind that one day he wanted to be worth a million dollars, after tax. At any rate, he'd just blurted that last bit out before he fully understood what they were after. And they gave it to him! At that moment, on the basis of what he'd written on his blog, he went from being an indebted medical student with a net worth of minus $105,000 to a millionaire with a few outstanding loans. Burry didn't know it, but it was the first time Joel Greenblatt had done such a thing. "He was just obviously this brilliant guy, and there aren't that many of them," says Greenblatt.

Shortly after that odd encounter, he had a call from the insurance holding company White Mountains. White Mountains was run by Jack Byrne, a member of Warren Buffett's inner circle, and they had spoken to Gotham Capital. "We didn't know you were selling part of your firm," they said--and Burry explained that he didn't realize it either until a few days earlier, when someone offered a million dollars, after tax, for it. It turned out that White Mountains, too, had been watching Michael Burry closely. "What intrigued us more than anything was that he was a neurology resident," says Kip Oberting, then at White Mountains. "When the hell was he doing this?" From White Mountains he extracted $600,000 for a smaller piece of his fund, plus a promise to send him $10 million to invest. "And yes," said Oberting, "he was the only person we found on the Internet and cold-called and gave him money."

In Dr. Mike Burry's first year in business, he grappled briefly with the social dimension of running money. "Generally you don't raise any money unless you have a good meeting with people," he said, "and generally I don't want to be around people. And people who are with me generally figure that out." He went to a conference thrown by Bank of America to introduce new fund managers to wealthy investors, and those who attended figured that out. He gave a talk in which he argued that the way they measured risk was completely idiotic. They measured risk by volatility: how much a stock or bond happened to have jumped around in the past few years. Real risk was not volatility; real risk was stupid investment decisions. "By and large," he later put it, "the wealthiest of the wealthy and their representatives have accepted that most managers are average, and the better ones are able to achieve average returns while exhibiting below-average volatility. By this logic a dollar selling for fifty cents one day, sixty cents the next day, and forty cents the next somehow becomes worth less than a dollar selling for fifty cents all three days. I would argue that the ability to buy at forty cents presents opportunity, not risk, and that the dollar is still worth a dollar." He was greeted by silence and ate lunch alone. He sat at one of the big round tables just watching the people at the other tables happily jabber away.

When he spoke to people in the flesh, he could never tell what had put them off, his message or his person. He'd made a close study of Warren Buffett, who had somehow managed to be both wildly popular and hugely successful. Buffett had had trouble with people, too, in his youth. He'd used a Dale Carnegie course to learn how to interact more profitably with his fellow human beings. Mike Burry came of age in a different money culture. The Internet had displaced Dale Carnegie. He didn't need to meet people. He could explain himself online and wait for investors to find him. He could write up his elaborate thoughts and wait for people to read them and wire him their money to handle. "Buffett was too popular for me," said Burry. "I won't ever be a kindly grandfather figure."

This method of attracting funds suited Mike Burry. More to the point, it worked. He'd started Scion Capital with a bit more than a million dollars--the money from his mother and brothers and his own million, after tax. In his first full year, 2001, the S&P 500 fell 11.88 percent. Scion was up 55 percent. The next year, the S&P 500 fell again, by 22.1 percent, and yet Scion was up again: 16 percent. The next year, 2003, the stock market finally turned around and rose 28.69 percent, but Mike Burry beat it again--his investments rose by 50 percent. By the end of 2004, Mike Burry was managing $600 million and turning money away. "If he'd run his fund to maximize the amount he had under management, he'd have been running many, many billions of dollars," says a New York hedge fund manager who watched Burry's performance with growing incredulity. "He designed Scion so it was bad for business but good for investing."

"While capital raising may be a popularity contest," Burry wrote to his investors, perhaps to reassure them that it didn't matter if they loved their money manager, or even knew him, "intelligent investment is quite the opposite."

Warren Buffett had an acerbic partner, Charlie Munger, who evidently cared a lot less than Buffett did about whether people liked him. Back in 1995, Munger had given a talk at Harvard Business School called "The Psychology of Human Misjudgment." If you wanted to predict how people would behave, Munger said, you only had to look at their incentives. FedEx couldn't get its night shift to finish on time; they tried everything to speed it up but nothing worked--until they stopped paying night shift workers by the hour and started to pay them by the shift. Xerox created a new, better machine only to have it sell less well than the inferior older ones--until they figured out the salesmen got a bigger commission for selling the older one. "Well, you can say, 'Everybody knows that,'" said Munger. "I think I've been in the top five percent of my age cohort all my life in understanding the power of incentives, and all my life I've underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther."

Munger's remarks articulated a great deal of what Mike Burry, too, believed about markets and the people who comprised them. "I read that speech and I said, I agree with every single word of that," Burry said, adding, "Munger also has a fake eye." Burry had his own angle on this same subject, derived from the time he'd spent in medicine. Even in life or death situations, doctors, nurses, and patients all responded to bad incentives. In hospitals in which the reimbursement rates for appendectomies ran higher, for instance, the surgeons removed more appendixes. The evolution of eye surgery was another great example. In the 1990s, the ophthalmologists were building careers on performing cataract procedures. They'd take half an hour or less, and yet Medicare would reimburse them $1,700 a pop. In the late 1990s, Medicare slashed reimbursement levels to around $450 per procedure, and the incomes of the surgically minded ophthalmologists fell. Across America, ophthalmologists rediscovered an obscure and risky procedure called radial keratotomy, and there was a boom in surgery to correct small impairments of vision. The inadequately studied procedure was marketed as a cure for the suffering of contact lens wearers. "In reality," says Burry, "the incentive was to maintain their high, often one-to two-million-dollar incomes, and the justification followed. The industry rushed to come up with something less dangerous than radial keratotomy, and Lasik was eventually born."

Thus when Mike Burry went into business he made sure that he had the proper incentives. He disapproved of the typical hedge fund manager's deal. Taking 2 percent of assets off the top, as most did, meant the hedge fund manager got paid simply for amassing vast amounts of other people's money. Scion Capital charged investors only its actual expenses--which typically ran well below 1 percent of the assets. To make the first nickel for himself, he had to make investors' money grow. "Think about the genesis of Scion," says one of his early investors. "The guy has no money and he chooses to forgo a fee that any other hedge fund takes for granted. It was unheard of."

Right from the start, Scion Capital was madly, almost comically, successful. By the middle of 2005, over a period in which the broad stock market index had fallen by 6.84 percent, Burry's fund was up 242 percent and he was turning away investors. To his swelling audience, it didn't seem to matter whether the stock market rose or fell; Mike Burry found places to invest money shrewdly. He used no leverage and avoided shorting stocks. He was doing nothing more promising than buying common stocks and nothing more complicated than sitting in a room reading financial statements. For roughly $100 a year he became a subscriber to 10-K Wizard. Scion Capital's decision-making apparatus consisted of one guy in a room, with the door closed and the shades drawn, poring over publicly available information and data on 10-K Wizard. He went looking for court rulings, deal completions, or government regulatory changes--anything that might change the value of a company.

Often as not, he turned up what he called "ick" investments. In October 2001, he explained the concept in his letter to investors: "Ick investing means taking a special analytical interest in stocks that inspire a first reaction of 'ick.'"

The alarmingly named Avant! Corporation was a good example. He'd found it searching for the word "accepted" in news stories. He knew that, standing on the edge of the playing field, he needed to find unorthodox ways to tilt it to his advantage, and that usually meant finding unusual situations the world might not be fully aware of. "I wasn't searching for a news report of a scam or fraud per se," he said. "That would have been too backward-looking, and I was looking to get in front of something. I was looking for something happening in the courts that might lead to an investment thesis. An argument being accepted, a plea being accepted, a settlement being accepted by the court." A court had accepted a plea from a software company called the Avant! Corporation. Avant! had been accused of stealing from a competitor the software code that was the whole foundation of Avant!'s business. The company had $100 million in cash in the bank, was still generating $100 million a year of free cash flow--and had a market value of only $250 million! Michael Burry started digging; by the time he was done, he knew more about the Avant! Corporation than any man on earth. He was able to see that even if the executives went to jail (as they did) and the fines were paid (as they were), Avant! would be worth a lot more than the market then assumed. Most of its engineers were Chinese nationals on work visas, and thus trapped--there was no risk that anyone would quit before the lights were out. To make money on Avant!'s stock, however, he'd probably have to stomach short-term losses, as investors puked up shares in horrified response to negative publicity.

Burry bought his first shares of Avant! in June 2001 at $12 a share. Avant!'s management then appeared on the cover of an issue of Business Week under the headline "Does Crime Pay?" The stock plunged; Burry bought more. Avant!'s management went to jail. The stock fell some more. Mike Burry kept on buying it--all the way down to $2 a share. He became Avant!'s single largest shareholder; he pressed management for changes. "With [the former CEO's] criminal aura no longer a part of operating management," he wrote to the new bosses, "Avant! has a chance to demonstrate its concern for shareholders." In August, in another e-mail, he wrote, "Avant! still makes me feel I'm sleeping with the village slut. No matter how well my needs are met, I doubt I'll ever brag about it. The 'creep' factor is off the charts. I half think that if I pushed Avant! too hard I'd end up being terrorized by the Chinese mafia." Four months later, Avant! got taken over for $22 a share. "That was a classic Mike Burry trade," says one of his investors. "It goes up by ten times but first it goes down by half."

This isn't the sort of ride most investors enjoy, but it was, Burry thought, the essence of value investing. His job was to disagree loudly with popular sentiment. He couldn't do this if he was at the mercy of very short-term market moves, and so he didn't give his investors the ability to remove their money on short notice, as most hedge funds did. If you gave Scion your money to invest, you were stuck for at least a year. Burry also designed his fund to attract people who wanted to be long the stock market--who wanted to bet on stocks going up rather than stocks going down. "I am not a short at heart," he said. "I don't dig into companies looking to short them, generally. I want the upside to be much more than the downside, fundamentally." He also didn't like the idea of taking the risk of selling a stock short, as the risk was, theoretically, unlimited. It could only fall to zero, but it could rise to infinity.

Investing well was all about being paid the right price for risk. Increasingly, Burry felt that he wasn't. The problem wasn't confined to individual stocks. The Internet bubble had burst, and yet house prices in San Jose, the bubble's epicenter, were still rising. He investigated the stocks of home builders, and then the stocks of companies that insured home mortgages, like PMI. To one of his friends--a big-time East Coast professional investor--he wrote in May 2003 that the real estate bubble was being driven ever higher by the irrational behavior of mortgage lenders who were extending easy credit. "You just have to watch for the level at which even nearly unlimited or unprecedented credit can no longer drive the [housing] market higher," he wrote. "I am extremely bearish, and feel the consequences could very easily be a 50% drop in residential real estate in the U.S.... A large portion of current [housing] demand at current prices would disappear if only people became convinced that prices weren't rising. The collateral damage is likely to be orders of magnitude worse than anyone now considers."

When he set out to bet against the subprime mortgage bond market, in early 2005, the first big problem that he encountered was that the Wall Street investment banks that might sell him credit default swaps didn't share his sense of urgency. Mike Burry believed he had to place this bet now, before the U.S. housing market woke up and was restored to sanity. "I didn't expect fundamental deterioration in the underlying mortgage pools to hit critical levels for a couple years," he said--when the teaser rates would vanish and monthly payments would skyrocket. But he thought the market inevitably would see what he had seen and adjust. Someone on Wall Street would notice the fantastic increase in the riskiness of subprime mortgages and raise the price of insuring them accordingly. "It's going to blow up before I can get this trade on," he wrote in an e-mail.

As Burry lived his life by e-mail, he inadvertently kept a record of the birth of a new market from the point of view of its first retail customer. In retrospect, the amazing thing was just how quickly Wall Street firms went from having no idea what Mike Burry was talking about when he called and asked them about credit default swaps on subprime mortgage bonds, to reshaping their business in a way that left the new derivative smack at the center. The original mortgage bond market had come into the world in much the same way, messily, coaxed into existence by the extreme interest of a small handful of people on the margins of high finance. But it had taken years for that market to mature; this new market would be up and running and trading tens of billions of dollars' worth of risk within a few months.

The first thing Mike Burry needed, if he was going to buy insurance on a big pile of subprime mortgage bonds, was to create some kind of standard, widely agreed-upon contract. Whoever sold him a credit default swap on a subprime mortgage bond would one day owe him a great deal of money. He suspected that dealers might try to get out of paying it to him. A contract would make it harder for them to do that, and easier for him to sell to one dealer what he had bought from another--and thus to shop around for prices. An organization called International Swaps and Derivatives Association (ISDA) had the task of formalizing the terms of new securities.* ISDA already had a set of rules in place to govern credit default swaps on corporate bonds, but insurance on corporate bonds was a relatively simple matter. There was this event, called a default, that either did or did not happen. The company missed an interest payment, you had to settle. The insurance buyer might not collect the full 100 cents on the dollar--just as the bondholder might not lose 100 cents on the dollar, as the company's assets were worth something--but an independent judge could decide, in a way that was generally fair and satisfying, what the recovery would be. If the bondholders received 30 cents on the dollar--thus experiencing a loss of 70 cents--the guy who had bought the credit default swap got 70 cents.

Buying insurance on a pool of U.S. home mortgages was more complicated, because the pool didn't default all at once; rather, one homeowner at a time defaulted. The dealers--led by Deutsche Bank and Goldman Sachs--came up with a clever solution: the pay-as-you-go credit default swap. The buyer of the swap--the buyer of insurance--would be paid off not all at once, if and when the entire pool of mortgages went bust, but incrementally, as individual homeowners went into default.

The ISDA agreement took months of haggling among lawyers and traders from the big Wall Street firms, who would run the market. Burry's lawyer, Steve Druskin, was for some reason allowed to lurk on the phone calls--and even jump in from time to time and offer the Wall Street customer's point of view. Historically, a Wall Street firm worried over the creditworthiness of its customers; its customers often took it on faith that the casino would be able to pay off its winners. Mike Burry lacked faith. "I'm not making a bet against a bond," he said. "I'm making a bet against a system." He didn't want to buy flood insurance from Goldman Sachs only to find, when the flood came, Goldman Sachs washed away and unable to pay him off. As the value of the insurance contract changed--say, as floodwaters approached but before they actually destroyed the building--he wanted Goldman Sachs and Deutsche Bank to post collateral, to reflect the increase in value of what he owned.

On May 19, 2005--a month before the terms were finalized--Mike Burry did his first subprime mortgage deals. He bought $60 million in credit default swaps from Deutsche Bank--$10 million each on six different bonds. "The reference securities," these were called. 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'd read dozens of prospectuses and scoured hundreds more, looking for the dodgiest pools of mortgages, and was still pretty certain even then (and dead certain later) that he was the only human being on earth who read them, apart from the lawyers who drafted them. In doing so, he likely also 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.

He analyzed the relative importance of the loan-to-value ratios of the home loans, of second liens on the homes, of the location of the homes, of the absence of loan documentation and proof of income of the borrower, and a dozen or so other factors to determine the likelihood that a home loan made in America circa 2005 would go bad. Then he went looking for the bonds backed by the worst of the loans. It surprised him that Deutsche Bank didn't seem to care which bonds he picked to bet against. From their point of view, so far as he could tell, all subprime mortgage bonds were the same. The price of insurance was driven not by any independent analysis but by the ratings placed on the bond by the rating agencies, Moody's and Standard & Poor's.* If he wanted to buy insurance on the supposedly riskless triple-A-rated tranche, he might pay 20 basis points (0.20 percent); on the riskier A-rated tranches, he might pay 50 basis points (0.50 percent); and, on the even less safe triple-B-rated tranches, 200 basis points--that is, 2 percent. (A basis point is one-hundredth of one percentage point.) The triple-B-rated tranches--the ones that would be worth zero if the underlying mortgage pool experienced a loss of just 7 percent--were what he was after. He felt this to be a very conservative bet, which he was able, through analysis, to turn into even more of a sure thing. Anyone who even glanced at the prospectuses could see that there were many critical differences between one triple-B bond and the next--the percentage of interest-only loans contained in their underlying pool of mortgages, for example. He set out to cherry-pick the absolute worst ones, and was a bit worried that the investment banks would catch on to just how much he knew about specific mortgage bonds, and adjust their prices.

Once again they shocked and delighted him: Goldman Sachs e-mailed him a great long list of crappy mortgage bonds to choose from. "This was shocking to me, actually," he says. "They were all priced according to the lowest rating from one of the big three ratings agencies." He could pick from the list without alerting them to the depth of his knowledge. It was as if you could buy flood insurance on the house in the valley for the same price as flood insurance on the house on the mountaintop.

The market made no sense, but that didn't stop other Wall Street firms from jumping into it, in part because Mike Burry was pestering them. For weeks he hounded Bank of America until they agreed to sell him $5 million in credit default swaps. Twenty minutes after they sent their e-mail confirming the trade, they received another back from Burry: "So can we do another?" In a few weeks Mike Burry bought several hundred million dollars in credit default swaps from half a dozen banks, in chunks of $5 million. None of the sellers appeared to care very much which bonds they were insuring. He found one mortgage pool that was 100 percent floating-rate negative-amortizing mortgages--where the borrowers could choose the option of not paying any interest at all and simply accumulate a bigger and bigger debt until, presumably, they defaulted on it. Goldman Sachs not only sold him insurance on the pool but sent him a little note congratulating him on being the first person, on Wall Street or off, ever to buy insurance on that particular item. "I'm educating the experts here," Burry crowed in an e-mail.

He wasn't wasting a lot of time worrying about why these supposedly shrewd investment bankers were willing to sell him insurance so cheaply. He was worried that others would catch on and the opportunity would vanish. "I would play dumb quite a bit," he said, "making it seem to them like I don't really know what I'm doing. 'How do you do this again?' 'Oh, where can I find that information?' Or, 'Really?'--when they tell me something really obvious." It was one of the fringe benefits of living for so many years essentially alienated from the world around him: He could easily believe that he was right and the world was wrong.

The more Wall Street firms jumped into the new business, the easier it became for him to place his bets. For the first few months he was able to short, at most, $10 million at a time. Then, in late June 2005, he had a call from someone at Goldman Sachs asking him if he'd like to increase his trade size to $100 million a pop. "What needs to be remembered here," he wrote the next day, after he'd done it, "is that this is $100 million. That's an insane amount of money. And it just gets thrown around like it's three digits instead of nine."

By the end of July he owned credit default swaps on $750 million in subprime mortgage bonds and was privately bragging about it. "I believe no other hedge fund on the planet has this sort of investment, nowhere near to this degree, relative to the size of the portfolio," he wrote to one of his investors, who had caught wind that his hedge fund manager had some newfangled strategy. Now he couldn't help but wonder who exactly was on the other side of his trades--what madman would be selling him so much insurance on bonds he had handpicked to explode? The credit default swap was a zero-sum game. If Mike Burry made $100 million when the subprime mortgage bonds he had handpicked defaulted, someone else must have lost $100 million. Goldman Sachs made it clear that the ultimate seller wasn't Goldman Sachs. Goldman Sachs was simply standing between insurance buyer and insurance seller and taking a cut.

The willingness of whoever this person was to sell him such vast amounts of cheap insurance gave Mike Burry another idea: to start a fund that did nothing but buy insurance on subprime mortgage bonds. In a $600 million fund that was meant to be picking stocks, his bet was already gargantuan; but if he could raise the money explicitly for this new purpose, he could do many billions more. In August he wrote a proposal for a fund he called Milton's Opus and sent it out to his investors. ("The first question was always, 'What's Milton's Opus?'" He'd say, "Paradise Lost," but that usually just raised another question.) Most of them still had no idea that their champion stock picker had become so diverted by these esoteric insurance contracts called credit default swaps. Many wanted nothing to do with it; a few wondered if this meant that he was already doing this sort of thing with their money.

Instead of raising more money to buy credit default swaps on subprime mortgage bonds, he wound up making it more difficult to keep the ones he already owned. His investors were happy to let him pick stocks on their behalf, but they almost universally doubted his ability to foresee big macroeconomic trends. And they certainly didn't see why he should have any special insight into the multi-trillion-dollar subprime mortgage bond market. Milton's Opus died a quick death.

In October 2005, in his letter to investors, Burry finally came completely clean and let them know that they owned at least a billion dollars in credit default swaps on subprime mortgage bonds. "Sometimes markets err big time," he wrote.

Markets erred when they gave America Online the currency to buy Time Warner. They erred when they bet against George Soros and for the British pound. And they are erring right now by continuing to float along as if the most significant credit bubble history has ever seen does not exist. Opportunities are rare, and large opportunities on which one can put nearly unlimited capital to work at tremendous potential returns are even more rare. Selectively shorting the most problematic mortgage-backed securities in history today amounts to just such an opportunity.

In the second quarter of 2005, credit card delinquencies hit an all-time high--even though house prices had boomed. That is, even with this asset to borrow against, Americans were struggling more than ever to meet their obligations. The Federal Reserve had raised interest rates, but mortgage rates were still effectively falling--because Wall Street was finding ever more clever ways to enable people to borrow money. Burry now had more than a billion-dollar bet on the table and couldn't grow it much more unless he attracted a lot more money. So he just laid it out for his investors: The U.S. mortgage bond market was huge, bigger than the market for U.S. Treasury notes and bonds. The entire economy was premised on its stability, and its stability in turn depended on house prices continuing to rise. "It is ludicrous to believe that asset bubbles can only be recognized in hindsight," he wrote. "There are specific identifiers that are entirely recognizable during the bubble's inflation. One hallmark of mania is the rapid rise in the incidence and complexity of fraud.... The FBI reports mortgage-related fraud is up fivefold since 2000." Bad behavior was no longer on the fringes of an otherwise sound economy; it was its central feature. "The salient point about the modern vintage of housing-related fraud is its integral place within our nation's institutions," he added.

This wasn't all that different from what he'd been saying in his quarterly letters to his investors for the past two years. Back in July 2003, he'd written them a long essay on the causes and consequences of what he took to be a likely housing crash: "Alan Greenspan assures us that home prices are not prone to bubbles--or major deflations--on any national scale," he'd said. "This is ridiculous, of course.... In 1933, during the fourth year of the Great Depression, the United States found itself in the midst of a housing crisis that put housing starts at 10% of the level of 1925. Roughly half of all mortgage debt was in default. During the 1930s, housing prices collapsed nationwide by roughly 80%." He harped on the same theme again in January 2004, then again in January 2005: "Want to borrow $1,000,000 for just $25 a month? Quicken Loans has now introduced an interest only adjustable rate mortgage that gives borrowers six months with both zero payments and a 0.03% interest rate, no doubt in support of that wholesome slice of Americana--the home buyer with the short term cash flow problem."

When his investors learned that their money manager had actually put their money directly where his mouth had long been, they were not exactly pleased. As one investor put it, "Mike's the best stock picker anyone knows. And he's doing...what?" Some were upset that a guy they had hired to pick stocks had gone off to pick rotten mortgage bonds instead; some wondered, if credit default swaps were such a great deal, why Goldman Sachs would be selling them; some questioned the wisdom of trying to call the top of a seventy-year housing cycle; some didn't really understand exactly what a credit default swap was, or how it worked. "It has been my experience that apocalyptic forecasts on the U.S. financial markets are rarely realized within limited horizons," one investor wrote to Burry. "There have been legitimate apocalyptic cases to be made on U.S. financial markets during most of my career. They usually have not been realized." Burry replied that while it was true that he foresaw Armageddon, he wasn't betting on it. That was the beauty of credit default swaps: They enabled him to make a fortune if just a tiny fraction of these dubious pools of mortgages went bad.

Inadvertently, he'd opened up a debate with his own investors, which he counted among his least favorite activities. "I hated discussing ideas with investors," he said, "because I then become a Defender of the Idea, and that influences your thought process." Once you became an idea's defender you had a harder time changing your mind about it. He had no choice: Among the people who gave him money there was pretty obviously a built-in skepticism of so-called macro thinking. They could understand why this very bright guy rooting around in financial statements might stumble across a small company no one else was paying attention to. They couldn't see why he should have a deeper understanding of trends and global forces apparent to any American who flipped on a cable news program. "I have heard that White Mountain would rather I stick to my knitting," he wrote, testily, to his original backer, "though it is not clear to me that White Mountain has historically understood what my knitting really is." No one seemed able to see what was so plain to him: These credit default swaps were all part of his global search for value. "I don't take breaks in my search for value," he wrote to White Mountains. "There is no golf or other hobby to distract me. Seeing value is what I do."

When he'd started Scion, he'd told potential investors that, because he was in the business of making unfashionable bets, they should evaluate him over the long term--say, five years. Now he was being evaluated moment to moment. "Early on, people invested in me because of my letters," he said. "And then somehow after they invested, they stopped reading them." His fantastic success attracted lots of new investors, but they were less interested in the spirit of his enterprise than in how much money he could make them quickly. Every quarter, he told them how much he'd made or lost from his stock picks. Now he had to explain that they had to subtract from that number these...subprime mortgage bond insurance premiums. One of his New York investors called and said ominously, "You know a lot of people are talking about withdrawing funds from you."

As their funds were contractually stuck inside Scion Capital for some time, the investors' only recourse was to send him disturbed-sounding e-mails asking him to justify his new strategy. "People get hung up on the difference between +5% and -5% for a couple of years," Burry replied to one investor who had protested the new strategy. "When the real issue is: over 10 years who does 10% basis points better annually? And I firmly believe that to achieve that advantage on an annual basis, I have to be able to look out past the next couple of years.... I have to be steadfast in the face of popular discontent if that's what the fundamentals tell me." In the five years since he had started, the S&P 500, against which he was measured, was down 6.84 percent. In the same period, he reminded his investors, Scion Capital was up 242 percent. He assumed he'd earned the rope to hang himself. He assumed wrong. "I'm building breathtaking sand castles," he wrote, "but nothing stops the tide from coming and coming and coming."

Oddly, as Mike Burry's investors grew restive, his Wall Street counterparties took a new and envious interest in what he was up to. In late October 2005, a subprime trader at Goldman Sachs called to ask him why he was buying credit default swaps on such very specific tranches of subprime mortgage bonds. The trader let it slip that a number of hedge funds had been calling Goldman to ask "how to do the short housing trade that Scion is doing." Among those asking about it were people Burry had solicited for Milton's Opus--people who had initially expressed great interest. "These people by and large did not know anything about how to do the trade and expected Goldman to help them replicate it," Burry wrote in an e-mail to his CFO. "My suspicion is Goldman helped them, though they deny it." If nothing else, he now understood why he couldn't raise money for Milton's Opus. "If I describe it enough it sounds compelling, and people think they can do it for themselves," he wrote to an e-mail confidant. "If I don't describe it enough, it sounds scary and binary and I can't raise the capital." He had no talent for selling.

Now the subprime mortgage bond market appeared to be unraveling. Out of the blue, on November 4, Burry had an e-mail from the head subprime guy at Deutsche Bank, a fellow named Greg Lippmann. As it happened, Deutsche Bank had broken off relations with Mike Burry back in June, after Burry had been, in Deutsche Bank's view, overly aggressive in his demands for collateral. Now this guy calls and says he'd like to buy back the original six credit default swaps Scion had bought in May. As the $60 million represented a tiny slice of Burry's portfolio, and as he didn't want any more to do with Deutsche Bank than Deutsche Bank wanted to do with him, he sold them back, at a profit. Greg Lippmann wrote back hastily and ungrammatically, "Would you like to give us some other bonds that we can tell you what we will pay you."

Greg Lippmann of Deutsche Bank wanted to buy his billion dollars in credit default swaps! "Thank you for the look Greg," Burry replied. "We're good for now." He signed off, thinking, How strange. I haven't dealt with Deutsche Bank in five months. How does Greg Lippmann even know I own this giant pile of credit default swaps?

Three days later he heard from Goldman Sachs. His saleswoman, Veronica Grinstein, called him on her cell phone, which is what she did when she wanted to talk without being recorded. (Wall Street firms now recorded all calls made from their trading desks.) "I'd like a special favor," she asked. She, too, wanted to buy some of his credit default swaps. "Management is concerned," she said. They thought the traders had sold all this insurance without having any place they could go to buy it back. Could Mike Burry sell them $25 million of the stuff, at really generous prices, on the subprime mortgage bonds of his choosing? Just to placate Goldman management, you understand. Hanging up, he pinged Bank of America, on a hunch, to see if they would sell him more. They wouldn't. They, too, were looking to buy. Next came Morgan Stanley--again out of the blue. He hadn't done much business with Morgan Stanley, but evidently Morgan Stanley, too, wanted to buy whatever he had. He didn't know exactly why all these banks were suddenly so keen to buy insurance on subprime mortgage bonds, but there was one obvious reason: The loans suddenly were going bad at an alarming rate. Back in May, Mike Burry was betting on his theory of human behavior: The loans were structured to go bad. Now, in November, they were actually going bad.

The next morning, Burry opened the Wall Street Journal to find an article explaining how the new wave of adjustable-rate mortgages were defaulting, in their first nine months, at rates never before seen. Lower-middle-class America was tapped out. There was even a little chart to show readers who didn't have time to read the article. He thought, The cat's out of the bag. The world's about to change. Lenders will raise their standards; rating agencies will take a closer look; and no dealers in their right mind will sell insurance on subprime mortgage bonds at anything like the prices they've been selling it. "I'm thinking the lightbulb is going to pop on and some smart credit officer is going to say, 'Get out of these trades,'" he said. Most Wall Street traders were about to lose a lot of money--with perhaps one exception. Mike Burry had just received another e-mail, from one of his own investors, that suggested that Deutsche Bank might have been influenced by his one-eyed view of the financial markets: "Greg Lippmann, the head [subprime mortgage] trader at Deutsche Bank[,] was in here the other day," it read. "He told us that he was short 1 billion dollars of this stuff and was going to make 'oceans' of money (or something to that effect.) His exuberance was a little scary."