#DR.BURRY THE BIG SHORT CRACK#
Greenspan said that he sat through innumerable meetings at the Fed with crack economists, and not one of them warned of the problems that were to come. The former Fed chairman responded that my insights had been a “statistical illusion.” Perhaps, he suggested, I was just a supremely lucky flipper of coins. A week ago I learned the answer when Al Hunt of Bloomberg Television, who had read Michael Lewis’s book, “The Big Short,” which includes the story of my predictions, asked Mr. Since then, I have often wondered why nobody in Washington showed any interest in hearing exactly how I arrived at my conclusions that the housing bubble would burst when it did and that it could cripple the big financial institutions. Disheartened on many fronts, I shut down Scion Capital in 2008. Because I had been operating in the face of strong opposition from both my investors and the Wall Street community, it took everything I had to see these trades through to completion.
This was well in advance of the government bailouts. By early 2008, I feared the effects of government intervention and exited all our remaining credit default positions by auctioning them to the many Wall Street banks that were themselves by then desperate to buy protection against default. This was something I knew that Goldman Sachs and other derivatives dealers did not demand of AAA-rated A.I.G.ĭuring 2007, under constant pressure from my investors, I liquidated most of our credit default swaps at a substantial profit. What’s more, I demanded daily collateral settlement if positions moved in our favor, I wanted cash posted to our account the next day. I also specifically avoided using Lehman Brothers and Bear Stearns as counterparties, as I viewed both to be mortally exposed to the crisis I foresaw. Suspecting that my Wall Street counterparties might not be able or willing to pay up when the time came, I used six counterparties to minimize my exposure to any one of them. Our swaps covered many of the firms that failed or nearly failed, including the insurer American International Group and the mortgage lenders Fannie Mae and Freddie Mac. As the value of the bonds fell, the value of the credit default swaps would rise. That is, I purchased credit default swaps a type of insurance on billions of dollars worth of both subprime mortgage-backed securities and the bonds of many of the financial companies that would be devastated when the real estate bubble burst. To me, these agencies seemed not to be paying much attention.īy mid-2005, I had so much confidence in my analysis that I staked my reputation on it. reported that its mortgage fraud caseload increased fivefold from 2001 to 2004.Īt the same time, I also watched how ratings agencies vouched for subprime mortgage-backed securities. The incentive for fraud was great: the F.B.I. Meanwhile, home buyers, convinced by recent history that real estate prices would always rise, readily signed onto whatever mortgage would get them the biggest house. Increasingly, lenders concerned themselves more with the quantity of mortgages they sold than with their quality. The lenders generally then sold these risky loans to Wall Street to be packaged into mortgage-backed securities, thus passing along most of the risk.
Throughout 2004, I had watched as these mortgages were offered to more and more subprime borrowers those with the weakest credit. I had begun to worry about the housing market back in 2003, when lenders first resurrected interest-only mortgages, loosening their credit standards to generate a greater volume of loans. I knew that would mark the beginning of the end of the housing bubble it would mean that prices had risen with the expansion of easy mortgage lending as high as they could go. After studying the regulatory filings related to those securities, I waited for the lenders to offer the most risky mortgages conceivable to the least qualified buyers. My prediction was based on my research into the residential mortgage market and mortgage-backed securities. Back in 20, I argued as forcefully as I could, in letters to clients of my investment firm, Scion Capital, that the mortgage market would melt down in the second half of 2007, causing substantial damage to the economy. “Everybody missed it,” he said, “academia, the Federal Reserve, all regulators.”īut that is not how I remember it. ALAN GREENSPAN, the former chairman of the Federal Reserve, proclaimed last month that no one could have predicted the housing bubble.