Scion Capital Letters (Subprime Short)
Michael Burry · 2006
"Subprime mortgage-backed securities will collapse; buy CDS protection against the housing bubble."
Michael Burry, a value investor and former physician, concluded in 2005 that the US housing market was built on a foundation of fraudulent subprime mortgages. He convinced Wall Street banks to create a new instrument—Credit Default Swaps on mortgage bonds—so he could short the housing market.
Mortgage lenders were originating loans with 'teaser rates' to borrowers with no income or jobs (NINJA loans), then packaging them into Mortgage-Backed Securities (MBS). Ratings agencies rubber-stamped these toxic bonds as AAA safe. Burry realized that when the teaser rates reset after two years, massive defaults would trigger a cascading collapse of the tranches. He bought cheap insurance (CDS) against these bonds, bleeding premiums for years until the market finally collapsed in 2007.
What financial instrument did Michael Burry use to short the housing market?
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The explanation above is written with AI assistance. These are the originals — go to them to check it.
- Burry's own account: "I Saw the Crisis Coming. Why Didn't the Fed?"The New York Times (op-ed), via The Big Picture
Enron Short Thesis
"Enron's returns didn't cover its cost of capital and its accounting was opaque; the equity was worthless."