The Big Short

01The One-Eyed Doctor Who Saw Tomorrow

Far away from the glittering towers of Wall Street, a heavy metal-loving neurologist was quietly dissecting the American dream. Michael Burry was not your typical financial genius, and that was exactly his greatest advantage in a world blinded by its own hubris. To understand how the great financial crisis was first uncovered, you have to understand the deeply unconventional mind of Michael Burry. Growing up, Burry lost his left eye to a rare form of cancer when he was just two years old. He was fitted with a glass eye, which never quite aligned perfectly with his real one. This physical trait made him intensely self-conscious, driving a wedge between him and the normal social interactions of childhood. Rather than playing outside with other kids, he retreated into his own world—a world of silence, intense focus, and numbers. Numbers did not require him to make eye contact. Numbers did not judge his appearance. Numbers simply told the truth, provided you were willing to look at them closely enough. Burry eventually channeled his obsessive focus into a medical career, becoming a neurology resident at Stanford Hospital. He would work grueling sixteen-hour shifts, pushing his body to the absolute limit. Yet, when he finally went home, exhausted and drained, he did not sleep. Instead, he logged onto early internet message boards and wrote incredibly detailed, brilliant analyses of stock market value investing. He was a doctor by day and a financial savant by night. His blog posts were so meticulously researched and devastatingly accurate that they began to attract the attention of heavy-hitting Wall Street investors. Eventually, the pull of the markets became too strong. Burry left his medical career, took his small inheritance, and founded his own hedge fund, Scion Capital, operating out of a quiet office in San Jose, California. Burry’s investment philosophy was remarkably simple but incredibly difficult to execute: he read everything. While Wall Street analysts relied on summarized reports and sunny projections, Burry would lock himself in his office with bare feet, blast heavy metal music through his headphones, and read hundreds of pages of dense, mind-numbing financial prospectuses. This obsessive habit led him, in 2004, to look at the American housing market. What he found completely terrified him. The traditional American mortgage was a relatively safe financial instrument. A responsible borrower put down a twenty percent deposit, proved their income, and paid a fixed interest rate over thirty years. But Burry discovered that the rules had changed. Lenders were aggressively pushing "subprime" mortgages—loans given to people with terrible credit, no savings, and sometimes no actual jobs. To make matters worse, these loans often featured "teaser rates," meaning the interest was artificially low for the first two years before skyrocketing to an unaffordable level. Burry looked at the data and realized a mathematical certainty: when those teaser rates expired in a few years, millions of Americans were going to default on their homes simultaneously. The housing market was not a booming pillar of the American economy; it was a towering house of cards waiting for a strong breeze. But recognizing the bubble was only the first step. Burry had to figure out a way to profit from its inevitable collapse. The problem was that you couldn't easily "short" or bet against a house. You couldn't just borrow a house, sell it, and hope to buy it back cheaper later. Burry needed a specific financial instrument, something akin to an insurance policy on these terrible subprime mortgage bonds. If the bonds failed, the insurance would pay out massively. He called the major Wall Street banks—Goldman Sachs, Deutsche Bank, Morgan Stanley—and asked them if they could create a Credit Default Swap for subprime mortgage bonds. The bankers on the other end of the line were baffled. To them, the housing market was infallible. Housing prices always went up. Why would anyone want to buy insurance against the safest asset class in the world? They quietly laughed at the eccentric doctor from California, assuming he was throwing his clients' money away, and happily sold him the swaps. They were charging him a small annual premium, essentially taking free money from a fool. Or so they thought. Burry had just quietly purchased the matches that would eventually burn Wall Street to the ground, and he was perfectly willing to sit alone in his office and wait for the fire to start.