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EXCERPT

Betting on the Blind Side

Michael Burry always saw the world differentlydue, he believed, to the childhood loss of one eye. So when the 32-year-old investor spotted the huge bubble in the subprime-mortgage bond mar et, in 2!!", then created a way to bet against it, he wasn#t surprised that no one understood what he was doing. $n an e%cerpt from his new boo , The Big Short, the author charts Burry#s oddball maneuvers, his almost comical dealings with &oldman Sachs and other ban s as the mar et collapsed, and the true reason for his visionary obsession.
BY MICHAEL LEWIS PHOTOGRAPH BY JONAS FREDWALL KARLSSON APRIL 2010

Dr. Michael Burry in his home office, in Silicon Valley. My na ure is no o ha!e frien"s,# Burry conclu"e" years a$o. I%m ha&&y in my o'n hea".#

Excerpted from 'he Big Short( $nside the )oomsday Machine, by Michael Lewis, to be published this month by W. W. orton! " #$%$ by the author. $n early 2!!" a 32-year-old stoc -mar et investor and hedge-fund manager, Michael Burry, immersed himself for the first time in the bond mar et. *e learned all he could about how money got borrowed and lent in +merica. *e didn#t tal to anyone about what became his new obsession, he -ust sat alone in his office, in San .ose, /alifornia, and read boo s and articles and financial filings. *e wanted to now, especially, how subprime-mortgage bonds wor ed. + giant number of individual loans got piled up into a tower. 'he top floors got their money bac first and so got the highest ratings from Moody#s and S01, and the lowest interest rate. 'he low floors got their money bac last, suffered the first losses, and got the lowest ratings from Moody#s and S01. Because they were ta ing on more ris , the investors in the bottom floors received a higher rate of interest than investors in the top floors. $nvestors who bought mortgage bonds had to decide in which floor of the tower they wanted to invest, but Michael Burry wasn#t thin ing about buying mortgage bonds. *e was wondering how he might short, or bet against, subprime-mortgage bonds. 2very mortgage bond came with its own mind-numbingly tedious 33!-page prospectus. $f you read the fine print, you saw that each bond was its own little corporation. Burry spent the end of 2!!" and early 2!!4 scanning hundreds and actually reading do5ens of the prospectuses, certain he was the only one apart from the lawyers who drafted them to do soeven though you could get them all for 63!! a year from 3! 7i5ard.com. 'he subprime-mortgage mar et had a special talent for obscuring what needed to be clarified. + bond bac ed entirely by subprime mortgages, for e%ample, wasn#t called a subprimemortgage bond. $t was called an 8+.B.S.,9 or 8asset-bac ed security.9 $f you as ed )eutsche Ban e%actly what assets secured an asset-bac ed security, you#d be handed lists of more acronyms:.M.B.S., hels, helocs, +lt-+along with categories of credit you did not now e%isted ;8midprime9<. :.M.B.S. stood for 8residential-mortgage-bac ed security.9 hel stood for 8home-e=uity loan.9 heloc stood for 8home-e=uity line of credit.9 +lt-+ was -ust what they called crappy subprime-mortgage loans for which they hadn#t even bothered to ac=uire the proper documentsto, say, verify the borrower#s income. +ll of this could more clearly be called 8subprime loans,9 but the bond mar et wasn#t clear. 8Midprime9 was a ind of triumph of language over truth. Some crafty bond-mar et person had ga5ed upon the subprimemortgage sprawl, as an ambitious real-estate developer might ga5e upon >a land, and found an opportunity to rebrand some of the turf. $nside >a land there was a neighborhood, mas=uerading as an entirely separate town, called 8:oc ridge.9 Simply by refusing to be called 8>a land,9 8:oc ridge9 en-oyed higher property values. $nside the subprime-mortgage mar et there was now a similar neighborhood nown as 8midprime.9 But as early as 2!!", if you loo ed at the numbers, you could clearly see the decline in lending standards. $n Burry#s view, standards had not -ust fallen but hit bottom. 'he bottom even had a name( the interest-only negative-amorti5ing ad-ustable-rate subprime mortgage. ?ou, the homebuyer, actually were given the option of paying nothing at all, and rolling whatever interest you owed the ban into a higher principal balance. $t wasn#t hard to see what sort of person might li e to have such a loan( one with no income. 7hat Burry couldn#t understand was why a person who lent money would want to e%tend such a loan. 87hat you want to watch

are the lenders, not the borrowers,9 he said. 8'he borrowers will always be willing to ta e a great deal for themselves. $t#s up to the lenders to show restraint, and when they lose it, watch out.9 By 2!!3 he new that the borrowers had already lost it. By early 2!!4 he saw that lenders had, too. + lot of hedge-fund managers spent time chitchatting with their investors and treated their =uarterly letters to them as a formality. Burry disli ed tal ing to people face-to-face and thought of these letters as the single most important thing he did to let his investors now what he was up to. $n his =uarterly letters he coined a phrase to describe what he thought was happening( 8the e%tension of credit by instrument.9 'hat is, a lot of people couldn#t actually afford to pay their mortgages the old-fashioned way, and so the lenders were dreaming up new financial instruments to -ustify handing them new money. 8$t was a clear sign that lenders had lost it, constantly degrading their own standards to grow loan volumes,9 Burry said. *e could see why they were doing this( they didn#t eep the loans but sold them to &oldman Sachs and Morgan Stanley and 7ells @argo and the rest, which pac aged them into bonds and sold them off. 'he end buyers of subprime-mortgage bonds, he assumed, were -ust 8dumb money.9 *e#d study up on them, too, but later. *e now had a tactical investment problem. 'he various floors, or tranches, of subprimemortgage bonds all had one thing in common( the bonds were impossible to sell short. 'o sell a stoc or bond short, you needed to borrow it, and these tranches of mortgage bonds were tiny and impossible to find. ?ou could buy them or not buy them, but you couldn#t bet e%plicitly against them, the mar et for subprime mortgages simply had no place for people in it who too a dim view of them. ?ou might now with certainty that the entire subprime-mortgage-bond mar et was doomed, but you could do nothing about it. ?ou couldn#t short houses. ?ou could short the stoc s of homebuilding companies1ulte *omes, say, or 'oll Brothersbut that was e%pensive, indirect, and dangerous. Stoc prices could rise for a lot longer than Burry could stay solvent. + couple of years earlier, he#d discovered credit-default swaps. + credit-default swap was confusing mainly because it wasn#t really a swap at all. $t was an insurance policy, typically on a corporate bond, with periodic premium payments and a fi%ed term. @or instance, you might pay 62!!,!!! a year to buy a 3!-year credit-default swap on 63!! million in &eneral 2lectric bonds. 'he most you could lose was 62 million( 62!!,!!! a year for 3! years. 'he most you could ma e was 63!! million, if &eneral 2lectric defaulted on its debt anytime in the ne%t 3! years and bondholders recovered nothing. $t was a 5ero-sum bet( if you made 63!! million, the guy who had sold you the credit-default swap lost 63!! million. $t was also an asymmetric bet, li e laying down money on a number in roulette. 'he most you could lose were the chips you put on the table, but if your number came up, you made 3!, "!, even 4! times your money. 8/redit-default swaps remedied the problem of open-ended ris for me,9 said Burry. 8$f $ bought a credit-default swap, my downside was defined and certain, and the upside was many multiples of it.9 *e was already in the mar et for corporate credit-default swaps. $n 2!!" he began to buy insurance on companies he thought might suffer in a real-estate downturn( mortgage lenders, mortgage insurers, and so on. 'his wasn#t entirely satisfying. + real-estate-mar et meltdown might cause these companies to lose money, there was no guarantee that they would actually

go ban rupt. *e wanted a more direct tool for betting against subprime-mortgage lending. >n March 3A, 2!!4, alone in his office with the door closed and the shades pulled down, reading an abstruse te%tboo on credit derivatives, Michael Burry got an idea( credit-default swaps on subprime-mortgage bonds. 'he idea hit him as he read a boo about the evolution of the B.S. bond mar et and the creation, in the mid-3AA!s, at .. 1. Morgan, of the first corporate credit-default swaps. *e came to a passage e%plaining why ban s felt they needed credit-default swaps at all. $t wasn#t immediately obviousafter all, the best way to avoid the ris of &eneral 2lectric#s defaulting on its debt was not to lend to &eneral 2lectric in the first place. $n the beginning, credit-default swaps had been a tool for hedging( some ban had loaned more than they wanted to to &eneral 2lectric because &.2. had as ed for it, and they feared alienating a long-standing client, another ban changed its mind about the wisdom of lending to &.2. at all. Cery =uic ly, however, the new derivatives became tools for speculation( a lot of people wanted to ma e bets on the li elihood of &.2.#s defaulting. $t struc Burry( 7all Street is bound to do the same thing with subprime-mortgage bonds, too. &iven what was happening in the real-estate mar etand given what subprime-mortgage lenders were doinga lot of smart people eventually were going to want to ma e side bets on subprime-mortgage bonds. +nd the only way to do it would be to buy a credit-default swap. 'he credit-default swap would solve the single biggest problem with Mi e Burry#s big idea( timing. 'he subprime-mortgage loans being made in early 2!!4 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 fi%ed, two-year 8teaser9 rate. + mortgage created in early 2!!4 might have a two-year 8fi%ed9 rate of D percent that, in 2!!E, would -ump to 33 percent and provo e a wave of defaults. 'he faint tic ing sound of these loans would grow louder with time, until eventually a lot of people would suspect, as he suspected, that they were bombs. >nce that happened, no one would be willing to sell insurance on subprime-mortgage bonds. *e needed to lay his chips on the table now and wait for the casino to wa e up and change the odds of the game. + credit-default swap on a 3!-year subprime-mortgage bond was a bet designed to last for 3! years, in theory. *e figured that it would ta e only three to pay off. 'he only problem was that there was no such thing as a credit-default swap on a subprimemortgage bond, not that he could see. *e#d need to prod the big 7all Street firms to create them. But which firmsF $f he was right and the housing mar et crashed, these firms in the middle of the mar et were sure to lose a lot of money. 'here was no point buying insurance from a ban that went out of business the minute the insurance became valuable. *e didn#t even bother calling Bear Stearns and Gehman Brothers, as they were more e%posed to the mortgage-bond mar et than the other firms. &oldman Sachs, Morgan Stanley, )eutsche Ban , Ban of +merica, BBS, Merrill Gynch, and /itigroup were, to his mind, the most li ely to survive a crash. *e called them all. @ive of them had no idea what he was tal ing about, two came bac and said that, while the mar et didn#t e%ist, it might one day. $nside of three years, credit-default swaps on subprime-mortgage bonds would become a trillion-dollar mar et and precipitate hundreds of billions of losses inside big 7all Street firms. ?et, when Michael Burry pestered the firms in the beginning of 2!!4, only )eutsche Ban and &oldman Sachs had any

real interest in continuing the conversation. Ho one on 7all Street, as far as he could tell, saw what he was seeing. *e sensed that he was different from other people before he understood why. Before he was two years old he was diagnosed with a rare form of cancer, and the operation to remove the tumor had cost him his left eye. + boy with one eye sees the world differently from everyone else, but it didn#t ta e long for Mi e Burry to see his literal distinction in more figurative terms. &rown-ups were forever insisting that he should loo other people in the eye, especially when he was tal ing to them. 8$t too all my energy to loo someone in the eye,9 he said. 8$f $ am loo ing at you, that#s the one time $ now $ won#t be listening to you.9 *is left eye didn#t line up with whomever he was trying to tal to, when he was in social situations, trying to ma e chitchat, the person to whom he was spea ing would steadily drift left. 8$ don#t really now how to stop it,9 he said, 8so people -ust eep moving left until they#re standing way to my left, and $#m trying not to turn my head anymore. $ end up facing right and loo ing left with my good eye, through my nose.9 *is glass eye, he assumed, was the reason that face-to-face interaction with other people almost always ended badly for him. *e found it maddeningly difficult to read people#s nonverbal signals, and their verbal signals he often too more literally than they meant them. 7hen trying his best, he was often at his worst. 8My compliments tended not to come out right,9 he said. 8$ learned early that if you compliment somebody it#ll come out wrong. @or your si5e, you loo good. 'hat#s a really nice dress( it loo s homemade.9 'he glass eye became his private e%planation for why he hadn#t really fit in with groups. 'he eye oo5ed and wept and re=uired constant attention. $t wasn#t the sort of thing other ids ever allowed him to be unselfconscious about. 'hey called him cross-eyed, even though he wasn#t. 2very year they begged him to pop his eye out of its soc etbut when he complied, it became infected and disgusting and a cause of further ostracism. $n his glass eye he found the e%planation for other traits peculiar to himself. *is obsession with fairness, for e%ample. 7hen he noticed that pro bas etball stars were far less li ely to be called for traveling than lesser players, he didn#t -ust holler at the refs. *e stopped watching bas etball altogether, the in-ustice of it illed his interest in the sport. 2ven though he was ferociously competitive, well built, physically brave, and a good athlete, he didn#t care for team sports. 'he eye helped to e%plain this, as most team sports were ball sports, and a boy with poor depth perception and limited peripheral vision couldn#t very well play ball sports. *e tried hard at the less ball-centric positions in football, but his eye popped out if he hit someone too hard. *e preferred swimming, as it re=uired virtually no social interaction. Ho teammates. Ho ambiguity. ?ou -ust swam your time and you won or you lost. +fter a while even he ceased to find it surprising that he spent most of his time alone. By his late 2!s he thought of himself as the sort of person who didn#t have friends. *e#d gone through Santa 'eresa *igh School, in San .ose, B./.G.+., and Canderbilt Bniversity School of Medicine, and created not a single lasting bond. 7hat friendships he did have were formed and nurtured in writing, by email, the two people he considered to be true friends he had nown for a combined 2! years but had met in person a grand total of eight times. 8My nature is not to have friends,9 he said. 8$#m happy in my own head.9 Somehow he#d married twice. *is first wife was a woman of Iorean descent who wound up living in a different city ;8She often complained

that $ appeared to li e the idea of a relationship more than living the actual relationship9< and his second, to whom he was still married, was a Cietnamese-+merican woman he#d met on Match.com. $n his Match.com profile, he described himself fran ly as 8a medical resident with only one eye, an aw ward social manner, and 63"4,!!! in student loans.9 *is obsession with personal honesty was a cousin to his obsession with fairness. >bsessivenessthat was another trait he came to thin of as peculiar to himself. *is mind had no temperate 5one( he was either possessed by a sub-ect or not interested in it at all. 'here was an obvious downside to this =ualityhe had more trouble than most fa ing interest in other people#s concerns and hobbies, for instancebut an upside, too. 2ven as a small child he had a fantastic ability to focus and learn, with or without teachers. 7hen it synched with his interests, school came easy for himso easy that, as an undergraduate at B./.G.+., he could flip bac and forth between 2nglish and economics and pic up enough pre-medical training on the side to get himself admitted to the best medical schools in the country. *e attributed his unusual powers of concentration to his lac of interest in human interaction, and his lac of interest in human interaction J well, he was able to argue that basically everything that happened was caused, one way or the other, by his fa e left eye. 'his ability to wor and to focus set him apart even from other medical students. $n 3AAK, as a resident in neurology at Stanford *ospital, he mentioned to his superiors that, between 3"hour hospital shifts, he had stayed up two nights in a row ta ing apart and putting bac together his personal computer in an attempt to ma e it run faster. *is superiors sent him to a psychiatrist, who diagnosed Mi e Burry as bipolar. *e new instantly he#d been misdiagnosed( how could you be bipolar if you were never depressedF >r, rather, if you were depressed only while doing your rounds and pretending to be interested in practicing, as opposed to studying, medicineF *e#d become a doctor not because he en-oyed medicine but because he didn#t find medical school terribly difficult. 'he actual practice of medicine, on the other hand, either bored or disgusted him. >f his first brush with gross anatomy( 8one scene with people carrying legs over their shoulders to the sin to wash out the feces -ust turned my stomach, and $ was done.9 >f his feeling about the patients( 8$ wanted to help peoplebut not really.9 *e was genuinely interested in computers, not for their own sa e but for their service to a lifelong obsession( the inner wor ings of the stoc mar et. 2ver since grade school, when his father had shown him the stoc tables at the bac of the newspaper and told him that the stoc mar et was a croo ed place and never to be trusted, let alone invested in, the sub-ect had fascinated him. 2ven as a id he had wanted to impose logic on this world of numbers. *e began to read about the mar et as a hobby. 1retty =uic ly he saw that there was no logic at all in the charts and graphs and waves and the endless chatter of many self-advertised mar et pros. 'hen along came the dot-com bubble and suddenly the entire stoc mar et made no sense at all. 8'he late A!s almost forced me to identify myself as a value investor, because $ thought what everybody else was doing was insane,9 he said. @ormali5ed as an approach to financial mar ets during the &reat )epression by Ben-amin &raham, 8value investing9 re=uired a tireless search for companies so unfashionable or misunderstood that they could be bought for less than their li=uidation value. $n its simplest form, value investing was a formula, but it had morphed into other thingsone of them was whatever 7arren Buffett, Ben-amin &raham#s student and the most famous value investor, happened to be doing with his money.

Burry did not thin investing could be reduced to a formula or learned from any one role model. 'he more he studied Buffett, the less he thought Buffett could be copied. $ndeed, the lesson of Buffett was( 'o 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. 8+t one point $ recogni5ed that 7arren Buffett, though he had every advantage in learning from Ben &raham, did not copy Ben &raham, but rather set out on his own path, and ran money his way, by his own rules.J $ also immediately internali5ed the idea that no school could teach someone how to be a great investor. $f it were true, it#d be the most popular school in the world, with an impossibly high tuition. So it must not be true.9 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. *e#d reached Stanford *ospital without ever ta ing a class in finance or accounting, let alone wor ing for any 7all Street firm. *e had maybe 6"!,!!! in cash, against 63"4,!!! in student loans. *e had spent the previous four years wor ing medical-student hours. Hevertheless, he had found time to ma e himself a financial e%pert of sorts. 8'ime is a variable continuum,9 he wrote to one of his e-mail friends one Sunday morning in 3AAA( 8+n afternoon can fly by or it can ta e 4 hours. Gi e you probably do, $ 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 fiancLe. Before $ went to college the military had this Mwe do more before Aam than most people do all day# and $ used to thin $ do more than the military. +s you now there are some select people that -ust find a drive in certain activities that supersedes everything else.9 'hin ing himself different, he didn#t find what happened to him when he collided with 7all Street nearly as bi5arre as it was. Gate one night in Hovember 3AAD, while on a cardiology rotation at Saint 'homas *ospital, in Hashville, 'ennessee, he logged on to a hospital computer and went to a message board called techstoc s.com. 'here he created a thread called 8value investing.9 *aving read everything there was to read about investing, he decided to learn a bit more about 8investing in the real world.9 + mania for $nternet stoc s gripped the mar et. + site for the Silicon Calley investor, circa 3AAD, was not a natural home for a sober-minded value investor. Still, many came, all with opinions. + 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. )r. Mi e Burryas he always signed himselfsensed that other people on the thread were ta ing his advice and ma ing 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. *e was wor ing 3D-hour shifts at the hospital, confining his blogging mainly to the hours between midnight and three in the morning. >n his blog he posted his stoc -mar et trades and his arguments for ma ing the trades. 1eople found him. +s a money manager at a big 1hiladelphia value fund said, 8'he first thing $ wondered was( 7hen is he doing thisF 'he guy was a medical intern. $ only saw the nonmedical part of his day, and it was simply awesome. *e#s showing people his trades. +nd people are following it in real time. *e#s doing value investingin the middle of the dot-com bubble. *e#s buying value stoc s, which is what we#re doing. But we#re losing money. 7e#re losing clients. +ll of a sudden he goes

on this tear. *e#s up 4! percent. $t#s uncanny. *e#s uncanny. +nd we#re not the only ones watching it.9 Mi e Burry couldn#t see e%actly who was following his financial moves, but he could tell which domains they came from. $n the beginning his readers came from 2arthGin and +>G. .ust random individuals. 1retty soon, however, they weren#t. 1eople were coming to his site from mutual funds li e @idelity and big 7all Street investment ban s li e Morgan Stanley. >ne day he lit into Canguard#s inde% funds and almost instantly received a cease-and-desist letter from Canguard#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. 8'he mar et found him,9 says the 1hiladelphia mutual-fund manager. e was recogni!ing patterns no one else was seeing. By the time Burry moved to Stanford *ospital, in 3AAK, to ta e up his residency in neurology, the wor 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 cra5e for $nternet stoc s was completely out of control and had infected the Stanford Bniversity medical community. 8'he residents in particular, and some of the faculty, were captivated by the dot-com bubble,9 said Burry. 8+ decent minority of them were buying and discussing everything1olycom, /orel, :a5orfish, 1ets.com, 'ib/o, Microsoft, )ell, $ntel are the ones $ specifically remember, but areyou iddingme.com was how my brain filtered a lot of it. $ would -ust eep my mouth shut, because $ didn#t want anybody there nowing what $ was doing on the side. $ felt $ could get in big trouble if the doctors there saw $ wasn#t 33! percent committed to medicine.9 1eople who worry about seeming sufficiently committed to medicine probably aren#t sufficiently committed to medicine. 'he deeper he got into his medical career, the more Burry felt constrained by his problems with other people in the flesh. *e had briefly tried to hide in pathology, where the people had the decency to be dead, but that didn#t wor . ;8)ead people, dead parts. More dead people, more dead parts. $ thought, $ want something more cerebral.9< *e#d moved bac to San .ose, buried his father, remarried, and been misdiagnosed as bipolar when he shut down his 7eb site and announced he was =uitting neurology to become a money manager. 'he chairman of the Stanford department of neurology thought he#d lost his mind and told him to ta e a year to thin it over, but he#d already thought it over. 8$ found it fascinating and seemingly true,9 he said, 8that if $ could run a portfolio well, then $ could achieve success in life, and that it wouldn#t matter what ind of person $ was perceived to be, even though $ felt $ was a good person deep down.9 *is 6"!,!!! in assets against 63"4,!!! in student loans posed the =uestion of e%actly what portfolio he would run. *is father had died after another misdiagnosis( a doctor had failed to spot the cancer on an N-ray, and the family had received a small settlement. 'he father disapproved of the stoc mar et, but the payout from his death funded his son into it. *is mother was able to ic in 62!,!!! from her settlement, his three brothers ic ed in 63!,!!! each of theirs. 7ith that, )r. Michael Burry opened Scion /apital. ;+s a teen he#d loved the boo The Scions of Shannara.< *e created a grandiose memo to lure people not related to him by blood. 8'he minimum net worth for investors should be 634 million,9 it said, which was interesting, as it e%cluded not only himself but basically everyone he#d ever nown.

+s he scrambled to find office space, buy furniture, and open a bro erage account, he received a pair of surprising phone calls. 'he first came from a big investment fund in Hew ?or /ity, &otham /apital. &otham was founded by a value-investment guru named .oel &reenblatt. Burry had read &reenblatt#s boo &ou 'an Be a Stoc( Mar(et )enius. ;8$ hated the title but li ed the boo .9< &reenblatt#s people told him that they had been ma ing money off his ideas for some time and wanted to continue to do somight Mi e Burry consider allowing &otham to invest in his fundF 8.oel &reenblatt himself called,9 said Burry, 8and said, M$#ve been waiting for you to leave medicine.#9 &otham flew Burry and his wife to Hew ?or and it was the first time Michael Burry had flown to Hew ?or or flown first-classand put him up in a suite at the $ntercontinental *otel. >n his way to his meeting with &reenblatt, Burry was rac ed with the an%iety that always plagued him before face-to-face encounters with people. *e too some comfort in the fact that the &otham people seemed to have read so much of what he had written. 8$f you read what $ wrote first, and then meet me, the meeting goes fine,9 he said. 81eople who meet me who haven#t read what $ wroteit almost never goes well. 2ven in high school it was li e thateven with teachers.9 *e was a wal ing blind taste test( you had to decide if you approved of him before you laid eyes on him. $n this case he was at a serious disadvantage, as he had no clue how big-time money managers dressed. 8*e calls me the day before the meeting,9 says one of his e-mail friends, himself a professional money manager. 8+nd he as s, M7hat should $ wearF# *e didn#t own a tie. *e had one blue sports coat, for funerals.9 'his was another =uir of Mi e Burry#s. $n writing, he presented himself formally, even a bit stuffily, but he dressed for the beach. 7al ing to &otham#s office, he panic ed and duc ed into a 'ie :ac and bought a tie. *e arrived at the big Hew ?or money-management firm as formally attired as he had ever been in his entire life to find its partners in '-shirts and sweatpants. 'he e%change went something li e this( 87e#d li e to give you a million dollars.9 82%cuse meF9 87e want to buy a =uarter of your new hedge fund. @or a million dollars.9 8?ou doF9 8?es. 7e#re offering a million dollars.9 8+fter ta%O9 Somehow Burry had it in his mind that one day he wanted to be worth a million dollars, after ta%. +t any rate, he#d -ust blurted that last bit out before he fully understood what they were after. +nd they gave it to himO +t that moment, on the basis of what he#d written on his blog, he went from being an indebted medical resident with a net worth of minus 63!4,!!! to a millionaire with a few outstanding loans. Burry didn#t now it, but it was the first time .oel &reenblatt had done such a thing. 8*e was -ust obviously this brilliant guy, and there aren#t that many of them,9 says &reenblatt. Shortly after that odd encounter, he had a call from the insurance holding company 7hite Mountain. 7hite Mountain was run by .ac Byrne, a member of 7arren Buffett#s inner circle, and they had spo en to &otham /apital. 87e didn#t now you were selling part of your firm,9 they saidand Burry e%plained that he hadn#t reali5ed it either until a few days earlier, when someone offered a million dollars, after ta%, for it. $t turned out that 7hite Mountain, too, had been watching Michael Burry closely. 87hat intrigued us more than anything was that he was a neurology resident,9 says Iip >berting, then at 7hite Mountain. 87hen the hell was he doing thisF9 @rom 7hite Mountain he e%tracted 6D!!,!!! for another piece of his fund, plus a promise to send him 63! million to invest. 8+nd yes,9 said >berting, 8he was the only person we found on the $nternet and cold-called and gave him money.9

$n )r. Mi e Burry#s first year in business, he grappled briefly with the social dimension of running money. 8&enerally you don#t raise any money unless you have a good meeting with people,9 he said, 8and generally $ don#t want to be around people. +nd people who are with me generally figure that out.9 7hen he spo e to people in the flesh, he could never tell what had put them off, his message or his person. Buffett had had trouble with people, too, in his youth. *e#d used a )ale /arnegie course to learn how to interact more profitably with his fellow human beings. Mi e Burry came of age in a different money culture. 'he $nternet had displaced )ale /arnegie. *e didn#t need to meet people. *e could e%plain himself online and wait for investors to find him. *e could write up his elaborate thoughts and wait for people to read them and wire him their money to handle. 8Buffett was too popular for me,9 said Burry. 8$ won#t ever be a indly grandfather figure.9 'his method of attracting funds suited Mi e Burry. More to the point, it wor ed. *e#d started Scion /apital with a bit more than a million dollarsthe money from his mother and brothers and his own million, after ta%. :ight from the start, Scion /apital was madly, almost comically successful. $n his first full year, 2!!3, the S01 4!! fell 33.KK percent. Scion was up 44 percent. 'he ne%t year, the S01 4!! fell again, by 22.3 percent, and yet Scion was up again( 3D percent. 'he ne%t year, 2!!3, the stoc mar et finally turned around and rose 2K.DA percent, but Mi e Burry beat it againhis investments rose by 4! percent. By the end of 2!!", Mi e Burry was managing 6D!! million and turning money away. 8$f he#d run his fund to ma%imi5e the amount he had under management, he#d have been running many, many billions of dollars,9 says a Hew ?or hedge-fund manager who watched Burry#s performance with growing incredulity. 8*e designed Scion so it was bad for business but good for investing.9 'hus when Mi e Burry went into business he disapproved of the typical hedge-fund manager#s deal. 'a ing 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 /apital charged investors only its actual e%penseswhich typically ran well below 3 percent of the assets. 'o ma e the first nic el for himself, he had to ma e investors# money grow. 8'hin about the genesis of Scion,9 says one of his early investors. 8'he guy has no money and he chooses to forgo a fee that any other hedge fund ta es for granted. $t was unheard of.9 By the middle of 2!!4, over a period in which the broad stoc -mar et inde% had fallen by D.K" percent, Burry#s fund was up 2"2 percent, and he was turning away investors. 'o his swelling audience, it didn#t seem to matter whether the stoc mar et rose or fell, Mi e Burry found places to invest money shrewdly. *e used no leverage and avoided shorting stoc s. *e was doing nothing more promising than buying common stoc s and nothing more complicated than sitting in a room reading financial statements. Scion /apital#s decision-ma ing apparatus consisted of one guy in a room, with the door closed and the shades down, poring over publicly available information and data on 3!-I 7i5ard. e went loo"ing for court rulings, deal completions, and government regulatory changes#anything that might change the value of a company. +s often as not, he turned up what he called 8ic 9 investments. $n >ctober 2!!3 he e%plained the concept in his letter to investors( 8$c investing means ta ing a special analytical interest in stoc s that inspire a first reaction of Mic .#9 + court had accepted a plea from a software company called the +vanti /orporation. +vanti had been accused of stealing from a competitor

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the software code that was the whole foundation of +vanti#s business. 'he company had 63!! million in cash in the ban , was still generating 63!! million a year in free cash flowand had a mar et value of only 624! millionO Michael Burry started digging, by the time he was done, he new more about the +vanti /orporation than any man on earth. *e was able to see that even if the e%ecutives went to -ail ;as five of them did< and the fines were paid ;as they were<, +vanti would be worth a lot more than the mar et then assumed. 'o ma e money on +vanti#s stoc , however, he#d probably have to stomach short-term losses, as investors pu ed up shares in horrified response to negative publicity. 8'hat was a classic Mi e Burry trade,9 says one of his investors. 8$t goes up by 3! times, but first it goes down by half.9 'his isn#t the sort of ride most investors en-oy, but it was, Burry thought, the essence of value investing. is job was to disagree loudly with popular sentiment. *e couldn#t do this if he was at the mercy of very short-term mar et moves, and so he didn#t give his investors the ability to remove their money on short notice, as most hedge funds did. $f you gave Scion your money to invest, you were stuc for at least a year. Investing well was all about being paid the right price for ris". $ncreasingly, Burry felt that he wasn#t. 'he problem wasn#t confined to individual stoc s. 'he $nternet bubble had burst, and yet house prices in San .ose, the bubble#s epicenter, were still rising. *e investigated the stoc s of homebuilders and then the stoc s of companies that insured home mortgages, li e 1M$. 'o one of his friendsa big-time 2ast /oast professional investorhe wrote in May 2!!3 that the real-estate bubble was being driven ever higher by the irrational behavior of mortgage lenders who were e%tending easy credit. $ou just have to watch for the level at which even nearly unlimited or unprecedented credit can no longer drive the %housing& mar"et higher, he wrote. I am e'tremely bearish, and feel the consequences could very easily be a ()* drop in residential real estate in the +.,. J+ large portion of current PhousingQ demand at current prices would disappear if only people became convinced that prices weren#t rising. 'he collateral damage is li ely to be orders of magnitude worse than anyone now considers.9 >n May 3A, 2!!4, Mi e Burry did his first subprime-mortgage deals. *e bought 6D! million of credit-default swaps from )eutsche Ban 63! million each on si% different bonds. 8'he reference securities,9 these were called. ?ou didn#t buy insurance on the entire subprimemortgage-bond mar et but on a particular bond, and Burry had devoted himself to finding e%actly the right ones to bet against. *e li ely became the only investor to do the sort of oldfashioned ban credit analysis on the home loans that should have been done before they were made. *e was the opposite of an old-fashioned ban er, however. *e was loo ing not for the best loans to ma e but the worst loansso that he could bet against them. *e analy5ed 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 do5en or so other factors to determine the li elihood that a home loan made in +merica circa 2!!4 would go bad. 'hen he went loo ing for the bonds bac ed by the worst of the loans. $t surprised him that )eutsche Ban didn#t seem to care which bonds he pic ed to bet against. @rom their point of view, so far as he could tell, all subprime-mortgage bonds were the same. 'he price of insurance was driven not by any independent analysis but by the ratings placed on

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the bond by Moody#s and Standard 0 1oor#s. $f he wanted to buy insurance on the supposedly ris less triple-+-rated tranche, he might pay 2! basis points ;!.2! percent<, on the ris ier, +rated tranches, he might pay 4! basis points ;!.4! percent<, and on the even less safe, triple-Brated tranches, 2!! basis pointsthat is, 2 percent. ;+ basis point is one-hundredth of one percentage point.< 'he triple-B-rated tranchesthe ones that would be worth 5ero if the underlying mortgage pool e%perienced a loss of -ust E percentwere what he was after. *e felt this to be a very conservative bet, which he was able, through analysis, to turn into even more of a sure thing. +nyone who even glanced at the prospectuses could see that there were many critical differences between one triple-B bond and the ne%tthe percentage of interest-only loans contained in their underlying pool of mortgages, for e%ample. *e set out to cherry-pic the absolute worst ones and was a bit worried that the investment ban s would catch on to -ust how much he new about specific mortgage bonds, and ad-ust their prices. >nce again they shoc ed and delighted him( &oldman Sachs e-mailed him a great long list of crappy mortgage bonds to choose from. 8'his was shoc ing to me, actually,9 he says. 8'hey were all priced according to the lowest rating from one of the big-three ratings agencies.9 *e could pic from the list without alerting them to the depth of his nowledge. $t 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. 'he mar et made no sense, but that didn#t stop other 7all Street firms from -umping into it, in part because Mi e Burry was pestering them. @or wee s he hounded Ban of +merica until they agreed to sell him 64 million in credit-default swaps. 'wenty minutes after they sent their e-mail confirming the trade, they received another bac from Burry( 8So can we do anotherF9 $n a few wee s Mi e Burry bought several hundred million dollars in credit-default swaps from half a do5en ban s, in chun s of 64 million. -one of the sellers appeared to care very much which bonds they were insuring. e found one mortgage pool that was .)) percent floating/rate negative/amorti!ing mortgages#where the borrowers could choose the option of not paying any interest at all and simply accumulate a bigger and bigger debt until, presumably, they defaulted on it. &oldman Sachs not only sold him insurance on the pool but sent him a little note congratulating him on being the first person, on 7all Street or off, ever to buy insurance on that particular item. 8$#m educating the e%perts here,9 Burry crowed in an e-mail. *e wasn#t wasting a lot of time worrying about why these supposedly shrewd investment ban ers were willing to sell him insurance so cheaply. *e was worried that others would catch on and the opportunity would vanish. 8$ would play dumb =uite a bit,9 he said, 8ma ing it seem to them li e $ don#t really now what $#m doing. M*ow do you do this againF# M>h, where can $ find that informationF# or M:eallyF#when they tell me something really obvious.9 It was one of the fringe benefits of living for so many years essentially alienated from the world around him0 he could easily believe that he was right and the world was wrong. 'he more 7all Street firms -umped into the new business, the easier it became for him to place his bets. @or the first few months, he was able to short, at most, 63! million at a time. 'hen, in late .une 2!!4, he had a call from someone at &oldman Sachs as ing him if he#d li e to increase his trade si5e to 63!! million a pop. 87hat needs to be remembered here,9 he wrote

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the ne%t day, after he#d done it, 8is that this is 63!! million. 'hat#s an insane amount of money. +nd it -ust gets thrown around li e it#s three digits instead of nine.9 By the end of .uly he owned credit-default swaps on 6E4! million in subprime-mortgage bonds and was privately bragging about it. 8$ believe no other hedge fund on the planet has this sort of investment, nowhere near to this degree, relative to the si5e of the portfolio,9 he wrote to one of his investors, who had caught wind that his hedge-fund manager had some newfangled strategy. How he couldn#t help but wonder who e%actly was on the other side of his trades what madman would be selling him so much insurance on bonds he had handpic ed to e%plodeF 'he credit-default swap was a 5ero-sum game. $f Mi e Burry made 63!! million when the subprime-mortgage bonds he had handpic ed defaulted, someone else must have lost 63!! million. &oldman Sachs made it clear that the ultimate seller wasn#t &oldman Sachs. &oldman Sachs was simply standing between insurance buyer and insurance seller and ta ing a cut. 'he willingness of whoever this person was to sell him such vast amounts of cheap insurance gave Mi e Burry another idea( to start a fund that did nothing but buy insurance on subprimemortgage bonds. $n a 6D!! million fund that was meant to be pic ing stoc s, his bet was already gargantuan, but if he could raise the money e%plicitly for this new purpose, he could do many billions more. $n +ugust he wrote a proposal for a fund he called Milton#s >pus and sent it out to his investors. ;8'he first =uestion was always M7hat#s Milton#s >pusF#9 *e#d say, 8*aradise Lost,9 but that usually -ust raised another =uestion.< Most of them still had no idea that their champion stoc pic er 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. $nstead of raising more money to buy credit-default swaps on subprime-mortgage bonds, he wound up ma ing it more difficult to eep the ones he already owned. *is investors were happy to let him pic stoc s on their behalf, but they almost universally doubted his ability to foresee big macro-economic trends. +nd they certainly didn#t see why he should have any special insight into the multi-trillion-dollar subprime-mortgage-bond mar et. Milton#s >pus died a =uic death. $n >ctober 2!!4, in his letter to investors, Burry finally came completely clean and let them now that they owned at least a billion dollars in credit-default swaps on subprime-mortgage bonds. 8Sometimes mar ets err big time,9 he wrote. 8Mar ets erred when they gave +merica >nline the currency to buy 'ime 7arner. 'hey erred when they bet against &eorge Soros and for the British pound. +nd they are erring right now by continuing to float along as if the most significant credit bubble history has ever seen does not e%ist. >pportunities are rare, and large opportunities on which one can put nearly unlimited capital to wor at tremendous potential returns are even more rare. Selectively shorting the most problematic mortgage-bac ed securities in history today amounts to -ust such an opportunity.9 $n the second =uarter of 2!!4, credit-card delin=uencies hit an all-time higheven though house prices had boomed. 'hat is, even with this asset to borrow against, +mericans were struggling more than ever to meet their obligations. 'he @ederal :eserve had raised interest rates, but mortgage rates were still effectively fallingbecause 7all 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 13

-ust laid it out for his investors( the B.S. mortgage-bond mar et was huge, bigger than the mar et for B.S. 'reasury notes and bonds. 1he entire economy was premised on its stability, and its stability in turn depended on house prices continuing to rise. 8$t is ludicrous to believe that asset bubbles can only be recogni5ed in hindsight,9 he wrote. 8'here are specific identifiers that are entirely recogni5able during the bubble#s inflation. >ne hallmar of mania is the rapid rise in the incidence and comple%ity of fraud.J 'he @B$ reports mortgage-related fraud is up fivefold since 2!!!.9 Bad behavior was no longer on the fringes of an otherwise sound economy, it was its central feature. 8'he salient point about the modern vintage of housing-related fraud is its integral place within our nation#s institutions,9 he added. 7hen his investors learned that their money manager had actually put their money directly where his mouth had long been, they were not e%actly pleased. +s one investor put it, 8Mi e#s the best stoc pic er anyone nows. +nd he#s doing J whatF9 Some were upset that a guy they had hired to pic stoc s had gone off to pic rotten mortgage bonds instead, some wondered, if credit-default swaps were such a great deal, why &oldman Sachs would be selling them 2 some questioned the wisdom of trying to call the top of a 3)/year housing cycle2 some didn#t really understand e%actly what a credit-default swap was, or how it wor ed. 8$t has been my e%perience that apocalyptic forecasts on the B.S. financial mar ets are rarely reali5ed within limited hori5ons,9 one investor wrote to Burry. 8'here have been legitimate apocalyptic cases to be made on B.S. financial mar ets during most of my career. 'hey usually have not been reali5ed.9 Burry replied that while it was true that he foresaw +rmageddon, he wasn#t betting on it. 'hat was the beauty of credit-default swaps( they enabled him to ma e a fortune if -ust a tiny fraction of these dubious pools of mortgages went bad. $nadvertently, he#d opened up a debate with his own investors, which he counted among his least favorite activities. I hated discussing ideas with investors, he said, because I then become a 4efender of the Idea, and that influences your thought process. >nce you became an idea#s defender, you had a harder time changing your mind about it. *e had no choice( among the people who gave him money there was pretty obviously a built-in s epticism of so-called macro thin ing. 8$ have heard that 7hite Mountain would rather $ stic to my nitting,9 he wrote, testily, to his original bac er, 8though it is not clear to me that 7hite Mountain has historically understood what my nitting really is.9 Ho one seemed able to see what was so plain to him( these credit-default swaps were all part of his global search for value. 8$ don#t ta e brea s in my search for value,9 he wrote to 7hite Mountain. 8'here is no golf or other hobby to distract me. Seeing value is what $ do.9 7hen he#d started Scion, he told potential investors that, because he was in the business of ma ing unfashionable bets, they should evaluate him over the long termsay, five years. How he was being evaluated moment to moment. 82arly on, people invested in me because of my letters,9 he said. 8+nd then, somehow, after they invested, they stopped reading them.9 *is 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 ma e them =uic ly. 2very =uarter, he told them how much he#d made or lost from his stoc pic s. How he had to e%plain that they had to subtract from that number these 0 subprime-mortgage-bond insurance premiums. >ne of his Hew ?or investors called and said ominously, 8?ou now, a lot of people are tal ing about withdrawing funds from you.9 +s their funds were contractually stuc inside Scion /apital for some time, the investors# only recourse was to send him disturbed-sounding e-mails as ing

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him to -ustify his new strategy. 81eople get hung up on the difference between R4S and -4S for a couple of years,9 Burry replied to one investor who had protested the new strategy. 87hen the real issue is( over 3! years who does 3!S or better annuallyF 5nd I firmly believe that to achieve that advantage on an annual basis, I have to be able to loo" out past the ne't couple of years.6 I have to be steadfast in the face of popular discontent if that7s what the fundamentals tell me. $n the five years since he had started, the S01 4!!, against which he was measured, was down D.K" percent. $n the same period, he reminded his investors, Scion /apital was up 2"2 percent. *e assumed he#d earned the rope to hang himself. *e assumed wrong. 8$#m building breathta ing sand castles,9 he wrote, 8but nothing stops the tide from coming and coming and coming.9 >ddly, as Mi e Burry#s investors grew restive, his 7all Street counterparties too a new and envious interest in what he was up to. $n late >ctober 2!!4, a subprime trader at &oldman Sachs called to as him why he was buying credit-default swaps on such very specific tranches of subprime-mortgage bonds. 'he trader let it slip that a number of hedge funds had been calling &oldman to as 8how to do the short housing trade that Scion is doing.9 +mong those as ing about it were people Burry had solicited for Milton#s >puspeople who had initially e%pressed great interest. 8'hese people by and large did not now anything about how to do the trade and e%pected &oldman to help them replicate it,9 Burry wrote in an e-mail to his /.@.>. 8My suspicion is &oldman helped them, though they deny it.9 $f nothing else, he now understood why he couldn#t raise money for Milton#s >pus. If I describe it enough it sounds compelling, and people thin" they can do it for themselves, he wrote to an e-mail confidant. 8$f $ don#t describe it enough, it sounds scary and binary and $ can#t raise the capital.9 *e had no talent for selling. How the subprime-mortgage-bond mar et appeared to be unraveling. >ut of the blue, on Hovember ", Burry had an e-mail from the head subprime guy at )eutsche Ban , a fellow named &reg Gippmann. +s it happened, )eutsche Ban had bro en off relations with Mi e Burry bac in .une, after Burry had been, in )eutsche Ban #s view, overly aggressive in his demands for collateral. How this guy calls and says he#d li e to buy bac the original si% creditdefault swaps Scion had bought in May. +s the 6D! million represented a tiny slice of Burry#s portfolio, and as he didn#t want any more to do with )eutsche Ban than )eutsche Ban wanted to do with him, he sold them bac , at a profit. &reg Gippmann wrote bac hastily and ungrammatically, 87ould you li e to give us some other bonds that we can tell you what we will pay you.9 &reg Gippmann of )eutsche Ban wanted to buy his billion dollars in credit-default swapsO 8'han you for the loo &reg,9 Burry replied. 87e#re good for now.9 *e signed off, thin ing, *ow strange. $ haven#t dealt with )eutsche Ban in five months. *ow does &reg Gippmann even now $ own this giant pile of credit-default swapsF 'hree days later he heard from &oldman Sachs. *is saleswoman, Ceronica &rinstein, called him on her cell phone instead of from the office phone. ;7all Street firms now recorded all calls made from their trading des s.< 8$#d li e a special favor,9 she as ed. She, too, wanted to buy some of his credit-default swaps. 8Management is concerned,9 she said. 'hey thought the traders had sold all this insurance without having any place they could go to buy it bac . /ould Mi e Burry sell them 624 million of the stuff, at really generous prices, on the subprime-

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mortgage bonds of his choosingF .ust to placate &oldman management, you understand. *anging up, he pinged Ban of +merica, on a hunch, to see if they would sell him more. 'hey wouldn#t. 'hey, too, were loo ing to buy. He%t came Morgan Stanleyagain out of the blue. *e hadn#t done much business with Morgan Stanley, but evidently Morgan Stanley, too, wanted to buy whatever he had. *e didn#t now e%actly why all these ban s were suddenly so een to buy insurance on subprime-mortgage bonds, but there was one obvious reason( the loans suddenly were going bad at an alarming rate. Bac in May, Mi e Burry was betting on his theory of human behavior( the loans were structured to go bad. How, in Hovember, they were actually going bad. 'he ne%t morning, Burry opened The Wall Street +ournal to find an article e%plaining how alarming numbers of ad-ustable-rate mortgage holders were falling behind on their payments, in their first nine months, at rates never before seen. Gower-middle-class +merica was tapped out. 'here was even a little chart to show readers who didn#t have time to read the article. *e thought, 'he cat#s out of the bag. 'he world#s about to change. Genders will raise their standards, rating agencies will ta e a closer loo , and no dealers in their right mind will sell insurance on subprime-mortgage bonds at anything li e the prices they#ve been selling it. 8$#m thin ing the lightbulb is going to pop on and some smart credit officer is going to say, M&et out of these trades,#9 he said. Most 7all Street traders were about to lose a lot of moneywith perhaps one e%ception. Mi e Burry had -ust received another e-mail, from one of his own investors, that suggested that )eutsche Ban might have been influenced by his one-eyed view of the financial mar ets( 8&reg Gippmann, the head Psubprime-mortgageQ trader at )eutsche Ban P,Q was in here the other day,9 it read. 8*e told us that he was short 3 billion dollars of this stuff and was going to ma e Moceans# of money ;or something to that effect.< *is e%uberance was a little scary.9 By @ebruary 2!!E, subprime loans were defaulting in record numbers, financial institutions were less steady every day, and no one but Mi e Burry seemed to recall what he#d said and done. *e had told his investors that they might need to be patientthat the bet might not pay off until the mortgages issued in 2!!4 reached the end of their teaser-rate period. 'hey had not been patient. Many of his investors mistrusted him, and he in turn felt betrayed by them. +t the beginning he had imagined the end, but none of the parts in between. 8$ guess $ wanted to -ust go to sleep and wa e up in 2!!E,9 he said. 'o eep his bets against subprime-mortgage bonds, he#d been forced to fire half his small staff, and dump billions of dollars# worth of bets he had made against the companies most closely associated with the subprime-mortgage mar et. *e was now more isolated than he#d ever been. 'he only thing that had changed was his e%planation for it. Hot long before, his wife had dragged him to the office of a Stanford psychologist. + pre-school teacher had noted certain worrying behaviors in their four-year-old son, Hicholas, and suggested he needed testing. Hicholas didn#t sleep when the other ids slept. *e drifted off when the teacher tal ed at any length. *is mind seemed 8very active.9 Michael Burry had to resist his urge to ta e offense. *e was, after all, a doctor, and he suspected that the teacher was trying to tell them that he had failed to diagnose attention-deficit disorder in his own son. 8$ had wor ed in an +.).*.). clinic during my residency and had strong feelings that this was overdiagnosed,9 he said. 8'hat it was a Msavior# diagnosis for too many ids whose parents wanted a medical reason to drug their children, or to e%plain their ids# bad behavior.9 *e

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suspected his son was a bit different from the other ids, but different in a good way. 8*e as ed a ton of =uestions,9 said Burry. 8$ had encouraged that, because $ always had a ton of =uestions as a id, and $ was frustrated when $ was told to be =uiet.9 How he watched his son more carefully and noted that the little boy, while smart, had problems with other people. 87hen he did try to interact, even though he didn#t do anything mean to the other ids, he#d somehow tic them off.9 *e came home and told his wife, 8)on#t worry about itO *e#s fineO9 *is wife stared at him and as ed, 8*ow would you nowF9 'o which )r. Michael Burry replied, 8Because he#s -ust li e meO 'hat#s how $ was.9 'heir son#s application to several indergartens met with =uic re-ections, unaccompanied by e%planations. 1ressed, one of the schools told Burry that his son suffered from inade=uate gross and fine motor s ills. 8*e had apparently scored very low on tests involving art and scissor use,9 said Burry. 8Big deal, $ thought. $ still draw li e a four-year-old, and $ hate art.9 'o silence his wife, however, he agreed to have their son tested. 8$t would -ust prove he#s a smart id, an Mabsentminded genius.#9 $nstead, the tests administered by a child psychologist proved that their child had +sperger#s syndrome. + classic case, she said, and recommended that he be pulled from the mainstream and sent to a special school. +nd )r. Michael Burry was dumbstruc ( he recalled +sperger#s from med school, but vaguely. *is wife now handed him the stac of boo s she had accumulated on autism and related disorders. >n top were The 'omplete )uide to ,sperger-s Syndrome, by a clinical psychologist named 'ony +ttwood, and +ttwood#s ,sperger-s Syndrome. , )uide for *arents and *rofessionals. 8Mar ed impairment in the use of multiple non-verbal behaviors such as eye-to-eye ga5e J 9 /hec . 8@ailure to develop peer relationships J 9 /hec . 8+ lac of spontaneous see ing to share en-oyment, interests, or achievements with other people J 9 /hec . 8)ifficulty reading the socialTemotional messages in someone#s eyes J 9 /hec . 8+ faulty emotion regulation or control mechanism for e%pressing anger J 9 /hec . 8>ne of the reasons why computers are so appealing is not only that you do not have to tal or sociali5e with them, but that they are logical, consistent and not prone to moods. 'hus they are an ideal interest for the person with +sperger#s Syndrome J 9 /hec . 8Many people have a hobby.J 'he difference between the normal range and the eccentricity observed in +sperger#s Syndrome is that these pursuits are often solitary, idiosyncratic and dominate the person#s time and conversation.9 /hec J /hec J/hec . +fter a few pages, Michael Burry reali5ed that he was no longer reading about his son but about himself. 8*ow many people can pic up a boo and find an instruction manual for their lifeF9 he said. 8$ hated reading a boo telling me who $ was. $ thought $ was different, but this was saying $ was the same as other people. My wife and $ were a typical +sperger#s couple, and we had an +sperger#s son.9 *is glass eye no longer e%plained anything, the wonder is that it ever had. *ow did a glass eye e%plain, in a competitive swimmer, a pathological fear of deep water the terror of not nowing what lur ed beneath himF *ow did it e%plain a childhood passion for washing moneyF *e#d ta e dollar bills and wash them, dry them off with a towel, press them between the pages of boo s, and then stac boo s on top of those boo sall so he might have money that loo ed 8new.9 8+ll of a sudden $#ve become this caricature,9 said Burry. 8$#ve always 17

been able to study up on something and ace something really fast. $ thought it was all something special about me. How it#s li e M>h, a lot of +sperger#s people can do that.# How $ was e%plained by a disorder.9 *e resisted the news. *e had a gift for finding and analy5ing information on the sub-ects that interested him intensely. *e always had been intensely interested in himself. How, at the age of 34, he#d been handed this new piece of information about himselfand his first reaction to it was to wish he hadn#t been given it. 8My first thought was that a lot of people must have this and don#t now it,9 he said. 8+nd $ wondered, $s this really a good thing for me to now at this pointF 7hy is it good for me to now this about myselfF9 *e went and found his own psychologist to help him sort out the effect of his syndrome on his wife and children. *is wor life, however, remained uninformed by the new information. *e didn#t alter the way he made investment decisions, for instance, or the way he communicated with his investors. *e didn#t let his investors now of his disorder. 8$ didn#t feel it was a material fact that had to be disclosed,9 he said. 8$t wasn#t a change. $ wasn#t diagnosed with something new. $t#s something $#d always had.9 >n the other hand, it e%plained an awful lot about what he did for a living, and how he did it( his obsessive ac=uisition of hard facts, his insistence on logic, his ability to plow =uic ly through reams of tedious financial statements. 1eople with +sperger#s couldn#t control what they were interested in. $t was a stro e of luc that his special interest was financial mar ets and not, say, collecting lawn-mower catalogues. 7hen he thought of it that way, he reali5ed that comple% modern financial mar ets were as good as designed to reward a person with +sperger#s who too an interest in them. 8>nly someone who has +sperger#s would read a subprime-mortgage-bond prospectus,9 he said. $ the spring of 2!!E, something changedthough at first it was hard to see what it was. >n .une 3", the pair of subprime-mortgage-bond hedge funds effectively owned by Bear Stearns were in freefall. $n the ensuing two wee s, the publicly traded inde% of triple-B-rated subprimemortgage bonds fell by nearly 2! percent. .ust then &oldman Sachs appeared to Burry to be e%periencing a nervous brea down. *is biggest positions were with &oldman, and &oldman was newly unable, or unwilling, to determine the value of those positions, and so could not say how much collateral should be shifted bac and forth. >n @riday, .une 34, Burry#s &oldman Sachs saleswoman, Ceronica &rinstein, vanished. *e called and e-mailed her, but she didn#t respond until late the following Mondayto tell him that she was 8out for the day.9 8'his is a recurrent theme whenever the mar et moves our way,9 wrote Burry. 81eople get sic , people are off for unspecified reasons.9 >n .une 2!, &rinstein finally returned to tell him that &oldman Sachs had e%perienced 8systems failure.9 'hat was funny, Burry replied, because Morgan Stanley had said more or less the same thing. +nd his salesman at Ban of +merica claimed they#d had a 8power outage.9 8$ viewed these Msystems problems# as e%cuses for buying time to sort out a mess behind the scenes,9 he said. 'he &oldman saleswoman made a wea effort to claim that, even as the inde% of subprime-mortgage bonds collapsed, the mar et for insuring them hadn#t budged. But she

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did it from her cell phone, rather than the office line. ;&rinstein didn#t respond to e-mail and phone re=uests for comment.< 'hey were caving. +ll of them. +t the end of every month, for nearly two years, Burry had watched 7all Street traders mar his positions against him. 'hat is, at the end of every month his bets against subprime bonds were mysteriously less valuable. 'he end of every month also happened to be when 7all Street traders sent their profit-and-loss statements to their managers and ris managers. >n .une 2A, Burry received a note from his Morgan Stanley salesman, +rt :ingness, saying that Morgan Stanley now wanted to ma e sure that 8the mar s are fair.9 'he ne%t day, &oldman followed suit. $t was the first time in two years that &oldman Sachs had not moved the trade against him at the end of the month. 8'hat was the first time they moved our mar s accurately,9 he notes, 8because they were getting in on the trade themselves.9 'he mar et was finally accepting the diagnosis of its own disorder. $t was precisely the moment he had told his investors, bac in the summer of 2!!4, that they only needed to wait for. /rappy mortgages worth nearly 6"!! billion were resetting from their teaser rates to new, higher rates. By the end of .uly his mar s were moving rapidly in his favor and he was reading about the genius of people li e .ohn 1aulson, who had come to the trade a year after he had. 'he Bloomberg Hews service ran an article about the few people who appeared to have seen the catastrophe coming. >nly one wor ed as a bond trader inside a big 7all Street firm( a formerly obscure asset-bac ed-bond trader at )eutsche Ban named &reg Gippmann. 'he investor most conspicuously absent from the Bloomberg Hews articleone who had made 63!! million for himself and 6E24 million for his investorssat alone in his office, in /upertino, /alifornia. By .une 3!, 2!!K, any investor who had stuc with Scion /apital from its beginning, on Hovember 3, 2!!!, had a gain, after fees and e%penses, of "KA.3" percent. ;'he gross gain of the fund had been E2D percent.< >ver the same period the S01 4!! returned -ust a bit more than 2 percent. Michael Burry clipped the Bloomberg article and e-mailed it around the office with a note( 8Gippmann is the guy that essentially too my idea and ran with it. 'o his credit.9 *is own investors, whose money he was doubling and more, said little. 'here came no apologies, and no gratitude. 8Hobody came bac and said, M?eah, you were right,#9 he said. 8$t was very =uiet. $t was e%tremely

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