It Wasn't Obvious to Me

March 15, 2010 2:27 PM

A lot of people figure things out, but it takes a special talent or maybe personality to figure it our and do something about it. Previously, we heard about the man who wrote the software that blew up the economy. Now we find out whom that software was written.

Michael Burry is the subject of Michael Lewis' latest Wall Street book, The Big Short. Michael Burry was a med student who figured out the impending subprime mortgage collapse, left the practice of medicine, set up a hedge fund, and created a market for a product that was the only way to bet against these subprime loans. He spent his whole life blaming his glass eye for his social awkwardness and his ability to focus in detail on any one subject. He later learned he had Asperger's. Can he credit that for his focus? What should he do about his son who has tested the same way? A related article and review. Also previously.

posted by JohnnyGunn (40 comments total)

"Now we find out whom that software was written."

But when will we find out whom was phone?
posted by mullingitover at 2:31 PM on March 15, 2010 [13 favorites]

Ugh. Blaming autism for the financial crisis? That's just peachy.
posted by stoneweaver at 2:33 PM on March 15, 2010 [1 favorite]

It seems easy to bet short when the government will bail out the banks, at the end. I'm curious how much he profited personally from taxpayer largesse.
posted by Blazecock Pileon at 2:33 PM on March 15, 2010

But when will we find out whom was phone?
I am disappoint you didn't accidentally the whole meme.
posted by The otter lady at 2:34 PM on March 15, 2010 [7 favorites]

Paging Carl... Carl, please report to the white courtesy phone...
posted by Madamina at 2:35 PM on March 15, 2010

Man is anyone else tired of reading things in Vanity Fair and seeing naked Ashton and naked Demi looking at them from the sidebar? When will that article stop being run?
posted by shakespeherian at 2:36 PM on March 15, 2010

Ugh. Blaming autism for the financial crisis? That's just peachy

Am I wrong in understanding that the guy with aspergers bet against the subprime market, so he was not the cause of the collapse, but benefited from it?
posted by Think_Long at 2:36 PM on March 15, 2010 [3 favorites]

Man is anyone else tired of reading things in Vanity Fair and seeing naked Ashton and naked Demi looking at them from the sidebar?

Not yet!
posted by Pope Guilty at 2:37 PM on March 15, 2010 [2 favorites]

It seems easy to bet short when the government will bail out the banks, at the end. I'm curious how much he profited personally from taxpayer largesse.

His benefit from the bailout would come to the extent that his counter party to the trade needed the government money in order to be able to honor the trade.
posted by JohnnyGunn at 2:38 PM on March 15, 2010 [1 favorite]

Am I wrong in understanding that the guy with aspergers bet against the subprime market, so he was not the cause of the collapse, but benefited from it?

No you are not wrong. He recognized the problem and bet the market for these bonds would collapse.
posted by JohnnyGunn at 2:39 PM on March 15, 2010 [2 favorites]

By doing something about it, I thought you meant that he tried to help. He profit off the market collapse. While it may have been smart of him, there's nothing morally admirable about it.
posted by Neekee at 2:50 PM on March 15, 2010 [1 favorite]

His benefit from the bailout would come to the extent that his counter party to the trade needed the government money in order to be able to honor the trade.

I'm curious if there is an actual number. For someone with Aspergers, he seemed a little emotional, a little aggrieved about making a lot of money for other people who didn't recognize his brilliance.
posted by Blazecock Pileon at 2:59 PM on March 15, 2010 [1 favorite]

Supposedly he was honest and open about where he thought the sub prime market was headed. That is helpful to a savvy investor, and probably represents the extent of his ability to mitigate the problem. He was a Wall Street outsider after all.
posted by BrotherCaine at 3:06 PM on March 15, 2010 [1 favorite]

Asperger's is not a lack of emotion-- in fact, at least some cases of Asperger's may be driven by too much emotion and sensory overload. Being upset about others not recognizing your brilliance is a very common experience of kids with Aspergers who have no clue that they are boring people to death and can't understand why others don't share their enthusiasms and recognize their talents. Obviously, missing social cues is the problem-- but people with Asperger's are often oversensitive, not Spocklike. However, their expression of emotion may be weird and some may appear cold-- it's variable.
posted by Maias at 3:07 PM on March 15, 2010 [4 favorites]

In the kingdom of the blind, apparently the one-eyed man really is king.
posted by GuyZero at 3:26 PM on March 15, 2010 [12 favorites]

Am I wrong in understanding that the guy with aspergers bet against the subprime market, so he was not the cause of the collapse, but benefited from it?

No you are not wrong. He recognized the problem and bet the market for these bonds would collapse.

According to the article, he invented credit default swaps for the subprime loan market, which some people blame for obscuring the level of risk that was out there and exacerbating the extent of the damage when the subprime market imploded. That's my understanding, anyway.
posted by ekroh at 3:36 PM on March 15, 2010

How crazy is it that you can buy insurance against something you don't own? Goldman Sachs might as well sell life insurance for unpopular people.
posted by GuyZero at 3:39 PM on March 15, 2010

GuyZero: "How crazy is it that you can buy insurance against something you don't own? Goldman Sachs might as well sell life insurance for unpopular people."

It all makes sense once you replace the words "buy insurance against" with the more accurate, "gamble on."
posted by mullingitover at 4:05 PM on March 15, 2010 [3 favorites]

How crazy is it that you can buy insurance against something you don't own? Goldman Sachs might as well sell life insurance for unpopular people.

It is insurance the same way a put option is insurance on a stock or future. Some people buy puts when they own the underlying instrument to protect against the downside. Some just buy puts hoping for a downside. That appears to be the case here.

To me, the issue lies with the folks who wrote the insurance or sold it to him. Without them, he could not have made his investment/bet. He seems to have said to himself, these wall street "geniuses" created this subprime market to trade (generate commissions) from the banks who were hooked on the lending crack that was driving their earnings. Giving loans where the interest payments just roll into more principle to folks with a poor credit history to begin with is batshitinsane. He went to Goldman and DB and said to them, ok, you created these subprime instruments to package these crappy loans would you please put your money where your mouth is and back them by selling me an instrument that bets against you guys.

I can certainly see why there is anger at his profiting from the whole subprime mess, but he was not the cause of the fall. He simply recognized the problem and profited from it. Isn't that what happens everyday with every trade? Options are a zero sum game. (unlike stocks) Your direct counterparty may not be the loser, but someone is losing a dollar for every dollar made. As for being morally wrong, he was extremely open about what he was doing. He was blogging about his strategies and he was up front about what he thought. If I read it correctly, his counterparties were the big banks and that is who he was profiting from. Either there should be no options market or accept the fact that the is a winner for every loser.
posted by JohnnyGunn at 4:10 PM on March 15, 2010 [4 favorites]

It all makes sense once you replace the words "buy insurance against" with the more accurate, "gamble on."

But changing the phrasing makes it a completely different activity from a regulatory point of view.
posted by GuyZero at 4:15 PM on March 15, 2010

he invented credit default swaps for the subprime loan market, which some people blame for obscuring the level of risk that was out there and exacerbating the extent of the damage when the subprime market imploded.

This guy's whole story is that he actually read, analyzed, and understood the information available early last decade. He wrote about it, in his spare time during a medical residency, on a blog that counted among its readership the smartest men in the room. He called the whole thing, early on, and when people were all like, huh? he went ahead and bet against them. He bet against the people who thought wrong or thought greedy about mortgages, told everyone about it (and everyone got really upset with him when he mentioned it) again and again, and finally came out the better after everything those geniuses had built went all to shit.

Burry may have been in a special condition/position to recognize the direction and limits of the housing market due to Asperger's, but it was the blind greed and stupidity (not reading the fine print? on hundreds of millions of dollars' worth of deals?) of lenders and insurance companies that are to blame for the current situation. He told everyone that Paradise was already lost and they just plugged their ears and NANANANANA'd their way to ruin.
posted by carsonb at 4:39 PM on March 15, 2010 [6 favorites]

So how is Burry betting on information like that in this headline from today's Times? Junk Bond Avalanch Looms for Credit Markets. And what can the rest of us do about it?
posted by extrabox at 4:58 PM on March 15, 2010

So how is Burry betting on information like that in this headline from today's Times?

Did you read the article? According to it, Burry doesn't bet on headlines. He doesn't invest like everyone else, doesn't attempt to capitalize on every shift and fluctuation. He sits down and digests a shitload of information into opportunities that are mis- or under-valued. That's how he wound up trading stock in an internet-bubble company that stole it's entire reason for being from another enterprise (and so was considered A Bad Idea by most), but still made a crapton of money. And that's how he wound up doing credit default swaps; he recognized the mis-valuation and capitalized on it.
posted by carsonb at 5:45 PM on March 15, 2010 [2 favorites]

This guy is a little bit summed up for me by his response to his patients during med school: "I wanted to help people -- but not really."

The financial system as a whole, which uses abstractions about the free market's value for everybody in order to justify the boundlessly greedy accumulation of capital, seems to have more or less the same attitude. Why are we repackaging mortgages and hedging bond purchases and massaging balance sheets? Because we want to put people in new homes, and make profits for our customers! But not really.
posted by Valet at 5:53 PM on March 15, 2010 [1 favorite]

I wish I'd had the balls (and the requisite level of investment knowledge) to have bet against subprime loans. This guy's advantage seems mainly to have fully understood what was going on with mortgage lending. And to have the guts to go for it.

In hindsight, I think it is perfectly obvious that what happened had to happen in the end; moreso, I think it was perfectly obvious from the start, although I suspect most of us never thought it all the way through clearly enough to put two and two together in a way that said "holy shit, what an opportunity to profit on obvious idiocy and inevitable tragedy!"
posted by five fresh fish at 6:16 PM on March 15, 2010

Mind, I'm not sure I feel bad about not thinking that way. Although I don't know that I could ever feel bad about betting against the douchebags on Wall Street and winning.
posted by five fresh fish at 6:19 PM on March 15, 2010

carsonb, yes, I read the article - that's why I figured he already has a position on it that might be known. I was curious as to what that was.
posted by extrabox at 6:23 PM on March 15, 2010

Shorting the subprime market had a net benefit to our economy. In fact, I would say he has done an incredible social good.

Let's say you were short a 2005 vintage subprime portfolio. Because you're having a net negative position, you would functionally be paying someone the interest on the mortgages and get the value of the total mortgage if it blows up (reminder: this is from the perspective of the bank, they pay out a lump sum and receive interest payments, the opposite of a homeowner).

Short-sellers: Pay interest (a.k.a. insurance) to protect against a blowup in the 2005 vintage mortages. If it does, they get the value of the mortgages in treasuries.
The Bank: Gets interest and pays out if it blows up. The bank then sells what short-sellers paid as a synthetic mortgage to people that want to buy mortgages.
3rd Sucker: Wants to buy mortgages but can't find them, they go to the bank and get a synthetic mortgage. To them it's no different than buying a real one, they buy it, then get paid interest over time(the insurance money that you paid), if it blows up, they don't get their money back plus interest.

The bank doesn't end up taking on any risk, and it is in their interest to encourage you to continue shorting, because they have a massive line of suckers. By encouraging you to short more, they make more synthetic mortgages.

Here's the essence of why it's good for the economy: By having the suckers dump money into synthetic mortgages, they end up losing all their money to short-sellers. This is just money changing hands, it is a net zero-sum to the economy. Had there not been anyone shorting, they would've encouraged the banks to make even more real loans! That means more houses would've been built and more people would've been suckered into getting mortgages. If you assume that a million dollar McMansion is no differnet than paying someone 1 million to dig a really deep hole that no one wants, then it's a lot better not to waste economic output encouraging more loans. In effect, the more short sellers of mortgages there were, the less likely that more homes would've been built. Short-selling mortgages isn't taking advantage of the misery of others, it's making sure we don't waste our prescious resources building homes no one needs.
posted by amuseDetachment at 6:24 PM on March 15, 2010

Short-sellers: Pay interest (a.k.a. insurance) to protect against a blowup in the 2005 vintage mortages. If it does, they get the value of the mortgages in treasuries.

This seems like a potentially confusing use of the term "short-sellers" to me.

To clarify, this is not how short-selling works in the stock market. In the stock market, short-sellers "borrow" shares of stock from a broker (the stocks actually already belong to someone else), then try to cash in later when the stock price declines by repaying the broker with the (now) cheaper stock and pocketing the difference between what the stock cost when they originally borrowed it and how much it costs when the broker called the margin (asked for the borrowed stock back).

Short selling in real estate generally means selling a house for less than the amount you owe on the house.

I'm not 100% clear on how the term short-selling applies here, except in the sense of betting on the downside in a very general sense. Just wanted to clarify this point, since there are pending public policy debates concerning the matter of 'short-selling' as that term applies specifically within the stock market, and it doesn't do anyone any good to let these very different issues get all muddled together incoherently. Not offered as a criticism, just a pedantic footnote.
posted by saulgoodman at 7:00 PM on March 15, 2010 [1 favorite]

He found one mortgage pool that was 100 percent floating-rate negative-amortizing 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. Goldman Sachs not only sold him insurance on the pool but sent him a little note congratulating him on being the first person, on Wall Street or off, ever to buy insurance on that particular item.

A pool of guaranteed defaults. There are people who should be doing some long jailtime for this.
posted by five fresh fish at 7:08 PM on March 15, 2010 [2 favorites]

I don't mind people who short stocks. I mind that the system was set up to fail simply so that a small subset of the market could make out like bandits.

Either there should be no options market or accept the fact that the is a winner for every loser.

That only applies if you are voluntarily in that sort of market. I didn't go after CDOs, I didn't get a liar mortgage, I didn't bet my job on these things. I shouldn't lose if I didn't bet.

Wall St is NOT the economy. The market is supposed to serve the economy (by generating liquidity etc) not the other way around. So monetary abstractions (financial tamagotchis) created simply so that the market service industry can make more money when people buy and sell the stupid things is not serving the economy.

(Sorry, I'm very get offa my lawn this week. A layoff does that)
posted by Artful Codger at 8:06 PM on March 15, 2010 [5 favorites]

And my vote for Most Misleading FPP of 2010 is already cast: JohnnyGunn, for implying that profiting from the collapse of the housing credit bubble is de facto causing the entire problem.

(Full Disclosure: I moved my 401k from stocks to bonds in June before the crash, so therefore I am the one responsible for the collapse of the Dow. My bad.)
posted by IAmBroom at 9:24 PM on March 15, 2010

saulgoodman: The traders are short-selling the mortgage itself, not the house. A short-sale of the house is a sale of the house at a lower price than what is owed, but that doesn't relate to mortgage from the bank's/traders' perspective. Short-selling by definition when it relates to financial instruments means holding a negative balance on an asset class.
posted by amuseDetachment at 10:14 PM on March 15, 2010

But when will we find out whom was phone?

Ah! Whom the phone rings?

The phone rings whom!
posted by humannaire at 10:16 PM on March 15, 2010

I wish I'd had the balls (and the requisite level of investment knowledge) to have bet against subprime loans.

I wish I'd had the money to bet against them.
posted by BrotherCaine at 1:41 AM on March 16, 2010

michael lewis (and burry) on '60 minutes' is worth watching; it's pretty damning of wall street and financial innovation... john mauldin btw helps put things in 'post-crisis' (present day) context in the implications of velocity as does andrew lo in evaluating and preventing a massive financial crisis :P

cheers!
posted by kliuless at 3:00 AM on March 16, 2010 [3 favorites]

And my vote for Most Misleading FPP of 2010 is already cast: JohnnyGunn, for implying that profiting from the collapse of the housing credit bubble is de facto causing the entire problem.

This is my first post, but that is not what I am implying at all. I am not sure where you get that impression.

In fact, I wish I had thought of what he did and had access to the product. Although it is not as black or white as this, but I like Dr. Burry.
posted by JohnnyGunn at 9:03 AM on March 16, 2010

Well, part of the problem is that the grammar of your post severely lacks basic comprehensibility: "Now we find out whom that software was written." As others have commented: what were you trying to actually communicate there?

Without the missing words in that sentence, we are forced to extrapolate. I (and no doubt others) came up with: "Now we find out for whom that software was written." That suggests that "the software that blew up the economy" was written for (at the behest of) the subject of the post... which is not true at all, according to the article.

That is where I got that impression.
posted by IAmBroom at 11:56 PM on March 16, 2010

xref...
posted by kliuless at 9:45 AM on March 20, 2010

OK, kliuless, another one of my posts. And your point?
posted by IAmBroom at 9:47 PM on March 21, 2010