Hunter is the author of the Distressed Debt Investing blog. His commentary has been seen in online versions of WSJ, FT, and BusinessWeek. Hunter currently works as an investing professional at a large money manager, focused on the credit markets. Previously, he worked at two large hedge funds, as an analyst working on distressed debt and event-driven investing situations.
One of our favorite investors of all time, Michael Burry, who I personally have been following for quite some time, gave a speech tonight at Vanderbilt University entitled: “Missteps to Mayhem: Inside the Doomsday Machine with the Outsider who Predicted and Profited from America’s Financial Armageddon”. Distressed Debt Investing was there (we have our tentacles everywhere) and are pleased to bring you notes from the speech. Enjoy!
As indicated by the lecture’s title most of Dr. Burry’s material was a blow-by-blow account of how and why the housing bubble occurred and how he profited from the resultant crash. To put his presentation in context, it is worth noting that the audience was comprised of people from many different academic and professional backgrounds. As such, much of the content was already familiar to those who’ve read Michael Lewis’s The Big Short and/or his Vanity Fair article. I assume the Distressed Debt Investing community is familiar with these works so my notes are focused on things I thought were not discussed in those works and interesting anecdotes that provide insight into his thought process.
To begin I was impressed with the turnout. I’ve heard that Vanderbilt’s Chancellor series is popular, but I was surprised that the approximately 500 seat lecture hall was well beyond capacity with at least 100 people sitting in the aisles or standing along the walls. The audience was very diverse with several doctors (Burry was a Vandy med school graduate), a priest and a fairly even mix of students and professionals.
• Dr. Burry began by semi-joking that of all the top fifty finance people he’s met, none were as smart as most of his med school classmates.
• He was attracted to investing because he was evaluated on performance not whether or not he looked people in the eye or was socially adept
• Being looked down on by more credentialed professionals is a hallmark of most trailblazing success stories, noting how John Bogle openly criticized him in a Forbes article
• He has always been attracted to “ick investments”
• Aside from being short $1.8 bln notional of sub-prime CDS he was also short $6.6 bln of corporate CDS in names including AIG, Wamu, Countrywide, Fannie and Freddie
• Due to Wall Street marking against him and his growing investor unrest he was forced to sell his corporate CDS and side pocket his subprime bets
• When he was first buying protection on sub-prime CDS he was making a psychological bet on the first real defaults, which he expected to soon start, causing the broader mortgage market to collapse. By late ’05, when defaults actually started occurring EVERYBODY should have seen what was coming
• Instead technical factors—most notably the deep CDS offer from synthetic CDOs and correlation traders—pushed the mortgage basis even tighter
• He really went after Goldman noting that e-mail have subsequently been disclosed that revealed GS orchestrated a short squeeze “to cause maximum pain” to existing shorts in order to pile on the trade themselves at better levels
• Paulson and Bernake grossly underestimated the problem. He is amazed that Paulson didn’t realize the extent of sub-prime exposure given his tenure at Goldman
• He notes that many people at different government agencies saw the crisis coming—even more so than he did—but weren’t listened to
• He expects easy monetary policy into the next presidential term
• QE “seems” to be working but is really just a big gamble
• QE2 brings the governments motives into question
• The “Toxic Twins”: fiat currency and an expansionary Fed will be a disaster
• Glass Stegall needs a 2nd go
• We are building a debtors’ prison for our children. Legacies are a fatal burden in a fast changing world
• Don’t tolerate blind faith, figure things for yourself
• Open a bank account in Canada
• When asked how to improve the mortgage industry he said that the first step would be eliminating the government’s stance that they should incentivize home ownership. People are smart enough to make their own rent/buy decisions. He would also require originators to hold 50% of their production on their balance sheets.
• He was very reluctant to reveal details of what he is investing in now
• He has bought some farmland, but for very specific factors including currency (didn’t really expand on this)
• He has funded some venture capital type investments in Silicon Valley; noted that Silicon Valley is the only place where pure capitalism exists today
• There are opportunities in small caps because they have lost sponsorship at most sell-side firms
• Doesn’t think large caps are as cheap as others do
• Hard to determine when people will lose faith in USTs
• You don’t have to be the smartest analyst, he was 50th percentile at best in his med school class; you just have to be most dogged
• Read every line item until you get it