Bloomberg profiles Michael Burry on Risk Takers

Bloomberg TV just aired a special on Scion Capital founder, Michael Burry that is worthwhile viewing for any trader or investor. 

If you missed the program, tune in now for a quick primer on Burry's entry into the investing world and the structuring of his now-famous subprime short CDS trade. This is a great story of how one blogger-turned-investor got his start operating a hedge fund and eventually shifted his focus from common stock value investing to diligently uncovering opportunities in the subprime mortgage and credit markets.

If you'd like to get a much more in-depth view of Burry's struggle to stick with his hugely rewarding trade during the height of the real estate bubble, check out Michael Lewis' book, The Big Short. 

You'll also want to check out the video of Burry's recent lecture on his "big short" trade and America's financial future at Vanderbilt University. 

There you'll find added links to our post on Michael Burry's emergence as a global macro star, plus a great deal of interview material with Burry and author, Michael Lewis (including some Bloomberg interview transcript material you may not have seen). Dig in and enjoy.

Michael Burry talks "Big Short", America's future at Vanderbilt

Michael Burry, the Scion Capital founder and subprime speculator profiled in Michael Lewis', The Big Short, talks to Vanderbilt students about his now-famous subprime CDS short trade and the perils of America's financial future in this video lecture.

Last week on Twitter, I retweeted DDI's notes on Michael Burry's talk, which gave rise to hopes that video of this talk might soon be available. Indeed, that video is now here and it has been making the rounds over the last few days.

Be sure to check DDI's post for comments from the Q&A (Burry's thoughts on farmland and capitalist innovation in Silicon Valley) that might have been edited out (?) of this video.

Burry's talk adheres to a script early on, but as he warms up near the second half of this presentation on the causes of the housing collapse and the financial crisis, the vibe is a bit more loose and the information presented is excellent throughout.

Watching this clip, I get the feeling that we are witnessing a first-rate historical commentary on the pre and post-crisis environment. If economic historians don't look back to Burry's talks, or Tom Woods' analysis of the crisis, they'll be doing everyone a huge disservice.

If you want to know a great deal more about Michael Burry's investments and his views on America's current cultural and financial condition, check out our posts in the section below. Lots of valuable info, including an unedited Bloomberg interview transcript, will be found here.

Related articles and posts:

1. Michael Burry: macro star? (Bloomberg interview transcript) - Finance Trends.

2. Michael Burry bullish on farmland & gold (Bloomberg) - Finance Trends.

3. Michael Lewis on Charlie Rose: The Big Short - Finance Trends.

Finance Trends: The Best of 2010

We're wrapping up some of your favorite posts (and mine) for this Finance Trends "Best of 2010" features edition.

You'll find key interviews with leading businessmen and investors, along with the best of this year's posts emphasizing the strong trends and events that are shaping our country, our investment markets, and our world.

Without further ado, here are some key posts highlighting the big picture trends we've witnessed in 2010, some of which may continue to unfold in 2011 and beyond.

1. On a Return to Classical Education. Your educationally-deprived editor muses over the benefits of a Classical education, and how such a foundation in thinking might help us as investors and as citizens of the world.

2. Marc Faber: Final Crisis Yet to Come. Wonderful presentation by Marc at this year's Mises Circle in NYC, offering a crucial take on US monetary policy and the likely outcomes of the Fed's "quantitative easing" experiments. Video and presentation slides included.

3. Niall Ferguson on Fiscal Crises and Imperial Collapse. Must hear presentation from Ferguson offers a historical overview of government debt crises. Highly relevant back in May and only more so now that the developed nations' sovereign debt crisis continues to unfold here at year-end 2010.

4. LTCM and the Lessons of Failure. Thoughts on hedge fund collapses (and fund manager resurrections), the money manager merry-go-round, risk management, and the dangers of overconfidence.

5. Must Hear Interview with John Burbank of Passport Capital. Part of our series on global macro investors and hedge fund managers, this excellent discussion with John Burbank comes to us via Benzinga podcast.

6. Michael Burry: An Up & Coming Macro Star? An in-depth look at Michael Burry's gradual transition from a US stock-focused value investor to an international, global macro investor.

Includes an unedited transcript of Bloomberg TV's interview with Burry, in which he offers his views on the economy, investing, and his famous subprime short trade.

7. Jim Grant, John Hathaway and Peter Munk sit down with Charlie Rose to discuss gold as money, the causes of the recent final crisis, and likely outcomes of Fed and government intervention in the markets.

8. John Allison on "Leadership and Values". The former CEO and Chairman of BB&T bank speaks to Virginia's Darden School of Business on the importance of adhering to a sound ethical framework and engaging in "win-win" business transactions. Excellent talk on the spirit of true capitalism and personal responsibility.

That's all for 2010. Please join us for more in 2011, as we explore the coming year's macro investing themes and future economic events.

You can keep up with us in the meantime through our real-time updates on Twitter and StockTwits or via the Finance Trends RSS blog feed. Have a Happy New Year!

*Photo credit: Floor of the New York Stock Exchange via LOC.gov.

Macro themes dominate the investing world

The rise of global macro investing and the increased importance of weighing macro themes in everyday investing were the subject of this recent Wall Street Journal piece entitled, "Macro Forces in Market Confound Stock Pickers" (Hat tip: Abnormal Returns).

An excerpt from that piece:

"The market turmoil has battered many investors over the past few years. But for stock pickers like Neuberger Berman LLC's David Pedowitz, it has made their entire investing approach feel like an exercise in futility.

Mr. Pedowitz buys and sells stocks based on research and analysis of individual companies. His investment strategy, he says, has been upended by a tidal wave of "macro" forces—big-picture market movers like the economy, politics and regulation.

More and more investors aren't bothering to pore through corporate reports searching for gems and duds, but are trading big buckets of stocks, bonds and commodities based mainly on macro concerns. As a result, all kinds of stocks—good as well as bad—are moving more in lock step.

"It's unbelievably frustrating," says Mr. Pedowitz, who helps manage $4.5 billion for wealthy clients and has 25 years of investing experience. "It's enough to make you crazy."

That kind of talk has become widespread on Wall Street as stock pickers discover that long-held investment strategies are no longer working very well..."

Note that Gregory Zuckerman, author of The Greatest Trade Ever, is a co-writer of this article. Which makes sense, given that the main subject of his book, John Paulson, was a convertible arbitrage trader turned macro-focused hedge fund manager who scored big with his now-famous subprime short trade.

Paulson's not the only one to embrace the macro approach; exhaustive researchers and value oriented stock pickers, David Einhorn and Michael Burry have also delved into macro investing in recent years with their subprime-related short trades and forays into gold, farmland, and commodities.

The authors of the WSJ piece note that in the aftermath of the 2008 financial crisis, many investors woke up to the fact that a big picture theme or an "unexpected" storm can wreak havok on their investment returns. Now, they are starting to look more at big picture trends in the economic and geopolitical spheres, as they realize these events can greatly influence their performance.

Witness this quote from David Einhorn:

"For years I had believed that I didn't need to take a view on the market or the economy because I considered myself a 'bottom-up investor,'" said hedge-fund manager David Einhorn of Greenlight Capital last year. "The lesson that I have learned is that it isn't reasonable to be agnostic about the big picture."

There you have it. The big picture outlook has permeated the investment world. Is this a temporary vogue in favor of macro investing, or are we all, to some extent, global macro investors now?

Related articles and posts:

1. Michael Burry: an up & coming macro star? - Finance Trends.

2. Must hear interview with John Burbank of Passport Capital - Finance Trends.

Michael Burry: an up and coming macro star?

Michael Burry is best known for his successful subprime CDS short trade during the great housing bubble of the mid-2000s (recently detailed by Greg Zuckerman in The Greatest Trade Ever, and in Michael Lewis' The Big Short).

What you may not know about Burry (if you haven't perused the ex post facto celebratory literature) is that he began his career as a value investing med student sharing ideas & research with fellow stock pickers on popular message boards like Silicon Investor, as well as on his blog, the now defunct valuestocks.net.

He then founded Scion Capital, a hedge fund devoted to his own unique brand of value investing and short speculating. As a witness to the relentless rise in real estate prices and the simultaneous plunge in borrowing standards for home mortgages, Burry decided to become a self-taught expert in subprime mortgage lending and the market for asset-backed securities based on these loans. His fund soon shifted its focus to shorting subprime bonds via the CDS market, and the rest, as they say, is history.

Now beyond these facts that anyone can find through an article search, I think there is another aspect of Burry's investing career that is coming to the fore: Michael Burry as global macro investor.

Last week we highlighted Bloomberg TV's interview with Burry, in which the California investor said he was investing in agricultural land, gold, smaller tech companies, and small cap companies in Asia.

While Burry is no longer managing funds for clients, he is definitely looking farther afield in his own investment portfolio. As he noted to Bloomberg, increased correlation in the price movements of asset classes has made it more difficult to find unique trades and investment opportunities.

So Michael Burry has moved well beyond his original focus of value investing and value-focused short selling of US shares, to an approach that embraces a variety of asset classes (land, gold, stocks) at home and abroad. In this sense, he is building on the global macro approach of his earlier subprime trade: combining a top down view of economic trends with intensive research in an effort to find the proper investment vehicle to express (and hopefully profit from) his view.

In this, he is joined by other successful investors, like John Paulson, whose own subprime short trade helped Paulson & Co. expand from its original mandate as a merger arbitrage & event-driven fund, into one of the largest hedge funds in the world with sub-funds devoted to gold, real estate, and macro bets on a US economic recovery.

While media attention surrounding Michael Lewis' book, The Big Short, tended to cast a disparaging light on Burry and his fellow subprime shorts (CBS' "60 Minutes" patronisingly dubbed him a "Wall Street Misfit"), it's nice to see him getting a chance to share his views on investing and the US economy through recent editorials in the NY Times and on Bloomberg TV.

Burry's most recent appearance on Bloomberg TV was edited down to a series of 3 minute clips for the web, but you can read the full transcript of his interview here (thanks to Bloomberg TV and Heidi Tan). If you're interested to find out more about his macro view, including his take on the post-housing bubble stimuli and the US and global economy, be sure to check this out.

BurryTranscript

Even though Michael Burry is now a private investor, we'll be keeping an eye out for more of his macro views and investing ideas. I hope he'll continue to share his thoughts in the future, because he seems like a very sharp guy, motivated to self-learning and investing on the basis of his own findings & views.

Michael Burry bullish on farmland, gold

Michael Burry, the California investor who profited by foreseeing the subprime mortgage collapse, is investing in farmland, small tech companies and Asian stocks, and gold.

Bloomberg has the details:

" “...I believe that agriculture land -- productive agricultural land with water on site -- will be very valuable in the future,” Burry, 39, said in a Bloomberg Television interview scheduled for broadcast this morning in New York. “I’ve put a good amount of money into that.”

Burry, as head of Scion Capital LLC, prodded Wall Street banks in early 2005 to create credit-default swaps to bet against bonds backed by the riskiest home loans. The strategy paid off as borrowers defaulted, letting his investors more than quintuple their money from 2000 to 2008, according to Michael Lewis’s book “The Big Short” (Norton/Allen Lane).

Burry, who now manages his own money after shuttering the fund in 2008, said finding original investments is difficult because many trades are crowded and asset classes often move together.

“I’m interested in finding investments that aren’t just simply going to float up and down with the market,” he said. “The incredible correlation that we’re experiencing -- we’ve been experiencing for a number of years -- is problematic.”..."

With so many hedge funds and investment firms following the same research and stalking the same ideas, it seems the larger companies and sectors are crowded trades. Burry is going further afield with his entry into farmland and smaller Asian stocks; it will be interesting to see if rising inflation from global money printing leads cash-averse investors to pile into some of these areas in the next few years.

More on the issue of gold and paper money inflation, currency devaluation in Bloomberg's article. You'll also find video interviews with Burry on Bloomberg TV, so be sure to check out the video tabs.

For more on Michael Burry and his successful subprime trade, see, "Michael Burry explains subprime CDS trade", as well as Michael Lewis' discussion of Burry and The Big Short with Charlie Rose. You can also click the "Michael Burry" label in our post footer to find more.

Market Shrinkology - Greatest Trade Ever

"Dr. Phil" Pearlman examines some of the important psychological trading themes at work in Greg Zuckerman's book, The Greatest Trade Ever, in this latest episode of Market Shrinkology on Stocktwits TV.

This particular episode happened to come at an interesting time, given the recent uproar over Goldman Sach's alleged impropriety in structuring and selling certain CDO deals to institutional clients, which Paulson & Co. (John Paulson is the central figure of Zuckerman's book) helped structure as a subprime vehicle they could sell short.

I think Phil does a great job of addressing not only some of the ethical questions that have cropped up around Paulson's trade in recent days, but the psychological factors (namely, "disposition effect") that were at work for investors like Paulson, Michael Burry, Andrew Lahde, and others who made their foray into this subprime short trade.

What does it take to enter and hold on to a big longer-term winning trade when almost everyone (including some of your investors) tells you you're wrong? Have a look as "(the real) Dr. Phil" deconstructs the psychology behind the Greatest Trade Ever.

Related articles and posts:

1. Interview: Greg Zuckerman (Greatest Trade Ever) - Fin. Trends.

2. Michael Burry: Betting the Blind Side - Vanity Fair.

3. FSN interview: Richard Eckert (Lahde Capital) - Finance Trends.

It's a Goldman kind of Friday

The SEC's civil suit against Goldman Sachs, accusing the firm of fraud in structuring certain mortgage backed CDOs (ABACUS 2007-AC1), has been the financial story of the day.

According to the SEC complaint, Goldman let a large hedge fund (Paulson & Co.) influence its structuring of synthetic CDOs, which were subsequently sold on to bullish clients (buyers such as pension funds and other large investors) under the premise of their being assembled by an independent party.

Wall Street Journal has the details:

"According to the SEC, Goldman structured and marketed a synthetic collateralized-debt obligation, or CDO, that hinged on the performance of subprime residential-mortgage-backed securities. The CDO was created in early 2007 when the U.S. housing market and related securities were beginning to show signs of distress, the SEC complaint said.

"Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc., with economic interests directly adverse to investors in the [CDO], played a significant role in the portfolio selection process," the complaint said.

The complaint said Paulson had an incentive to stuff the CDO with mortgage-backed securities that were likely to get into trouble. SEC enforcement chief Robert Khuzami alleged that Goldman misled investors by telling them that the securities "were selected by an independent, objective third party..."

The SEC's suit against Goldman Sachs has been the buzz of the day. Everyone is talking about it in the blogosphere, the business news media, and on Twitter and Stocktwits.

People want to discuss the political implications of the story, as well as forecast what is likely to happen to the principal parties involved: will there be a large fine/settlement, who will be thrown under the bus, why did this news just happen to come out on an option expiration Friday, and so on. Business Insider has even dedicated a special section to the Goldman Sachs story.

Meanwhile, it's interesting to note that the details of Goldman's CDO deals with Paulson & Co. were openly detailed in chapter 9 of Greg Zuckerman's book, The Greatest Trade Ever. John Paulson and his team met with various Wall Street firms (Deutsche Bank, Goldman Sachs, Bear Stearns) to discuss and negotiate the creation of new CDOs from pools of risky mortgages.

Paulson & Co. were open about their desire to short most tranches of the CDOs through the purchase of credit default swaps (CDS) on these CDO instruments. Some bankers (Scott Eichel at Bear Stearns, among others) turned down Paulson's proposed deals, while others (like Goldman) gladly accepted and negotiated with Paulson on the collateral backing the deals.

According to Zuckerman's book and Paulson's quotes, the bankers were ultimately responsible for what went into the CD0s that were sold to investors. It's worth pointing out that all those who took the bullish side of the trade did so of their own accord, and that "some investors were even consulted as the mortgage debt was picked for the CDOs to make sure it would appeal to them." (Zuckerman, page 181).

Having said that, Goldman probably should have been more forthright in dealing with its clients, instead of telling them (as the SEC complaint alleges) that the mortgage-backed CDOs they were buying were structured with the help of an "independent, third party".

Update: NPR interviewed Greg Zuckerman to get his thoughts on the Goldman Sachs charges and John Paulson's role in the CDO deals. Do check this out, as he quickly fills us in on some main points that people were guessing about (or just wildly wrong about) on Friday.

Related articles and posts:

1. Michael Burry explains his subprime CDS trade - Finance Trends.

2. FSN interview: Richard Eckert (Lahde Capital) - Finance Trends.

3. Lessons from John Paulson - Finance Trends.

4. NPR talks to Greg Zuckerman (Greatest Trade Ever) - NPR.org.

Michael Burry explains subprime CDS trade

Michael Burry explains credit default swaps and his subprime short to Scion Capital investors in this November 2006 document shared by Marketfolly:

"A big hat tip to Greenbackd for originally bringing this to our attention. Below you will find a very interesting primer on credit default swaps and the subprime mortgage short from Scion Capital's hedge fund manager Michael Burry.

Burry of course was recently featured in Michael Lewis' latest book, The Big Short (which we highly recommend reading) for his notable early short position in subprime mortgages.

Michael Burry penned his primer back on November 7th, 2006 and it's almost comical now to think about how he was running a value fund focused on equities and then all of a sudden has to explain his short subprime trade and complex derivatives to his certainly surprised and confused investors..."

Head on over there to read the full embedded document. Should make for very interesting reading, as by now I've read and heard several accounts of how difficult it was for Burry to hold on to his famous trade in the face of overwhelming resistance from his investors.

While you're at it, you can also check out Michael Burry's recent op-ed in the NY Times deflating the great Greenspan myth that "no one saw the crisis coming". Essential reading for those who believe the endless barrage of lies coming from the econo-political "elites".

Related articles and posts:

1. FSN interview: Richard Eckert (Lahde Capital) - Finance Trends.

2. Michael Lewis on Charlie Rose: The Big Short - Finance Trends.

FSN interview: Richard Eckert (Lahde Capital)

There's a great interview in the latest Financial Sense Newshour with Richard Eckert, the former CFO/risk manager at Lahde Capital Management.

The interview topic: "The Greatest Trade Ever: An insider's behind the scene view of how a hedge fund made millions out of the credit collapse."

For those who don't recall, Lahde Capital is the small Santa Monica hedge fund set up by Andrew Lahde, which profited mightily from short bets on the subprime housing market. After raking in his dough, Lahde famously kissed the hedge fund world goodbye in a widely circulated, and widely discussed, farewell letter to clients.

Lahde is also one of the main investors profiled in Gregory Zuckerman's book, The Greatest Trade Ever, a treasure trove of information on the subprime crash and the hedge fund managers who profited in the downturn.

As I come to the end of Zuckerman's book, one thing that I'm totally struck by are the obstacles that investors like Andrew Lahde, Michael Burry, and John Paulson met in executing their subprime trades and keeping those trades on in the face of financial worries, personal doubts, and total opposition to their ideas from nearly everyone they came in contact with (including their own investors).

How did they maintain their vision and stay with their winning trades until the end? That's an interesting subject, and perhaps FSN's interview with Richard Eckert will shine a little added light on that, and other aspects of Lahde's trade as well. Enjoy.

Related posts:

1. Michael Lewis on Charlie Rose: The Big Short - Finance Trends.

2. Michael Burry: Betting the Blind Side - Finance Trends.

Michael Lewis on Charlie Rose: The Big Short

Michael Lewis, well-known storyteller and author of The Big Short, joins Charlie Rose for a discussion of the financial crisis and the real-life characters in his new book, who saw the collapse coming and profited by shorting the subprime housing market.

There are many remarkable aspects to this story, but perhaps one of the most interesting themes to emerge from this discussion is Lewis' realization that the events chronicled so memorably in Liar's Poker were not, as he thought at the time, the end of an era, but rather the beginning of one that only seems to be ending now in 2010.

Enjoy the interview, and click over to our related posts for more insight on hedge fund managers Michael Burry, Andrew Lahde, and John Paulson, who profited from the subprime short trade and were profiled in Lewis' and Greg Zuckerman's latest books.

Michael Burry: Betting the Blind Side

Michael Lewis has a new book coming out called, The Big Short. It's supposed to be an account of the financial crisis and how the "US economy was driven off a cliff", thanks to the drive for cheap housing and the toxic investments Wall Street packaged around this goal.

Vanity Fair has published an excerpt from Lewis' book called, "Betting on the Blind Side", which highlights the subprime-housing short trade of California hedge fund manager, Dr. Michael Burry.

"In early 2004 a 32-year-old stock-market investor and hedge-fund manager, Michael Burry, immersed himself for the first time in the bond market. He learned all he could about how money got borrowed and lent in America. He didn’t talk to anyone about what became his new obsession; he just sat alone in his office, in San Jose, California, and read books and articles and financial filings.

He wanted to know, especially, how subprime-mortgage bonds worked. A giant number of individual loans got piled up into a tower. The top floors got their money back first and so got the highest ratings from Moody’s and S&P, and the lowest interest rate. The low floors got their money back last, suffered the first losses, and got the lowest ratings from Moody’s and S&P.

Because they were taking on more risk, the investors in the bottom floors received a higher rate of interest than investors in the top floors. Investors who bought mortgage bonds had to decide in which floor of the tower they wanted to invest, but Michael Burry wasn’t thinking about buying mortgage bonds. He was wondering how he might short, or bet against, subprime-mortgage bonds."

We mentioned Burry in yesterday's post, highlighting a passage from Greg Zuckerman's book, The Greatest Trade Ever, which pinpoints the moment that Michael Burry and John Paulson's subprime short aspirations were realized in the creation of credit-default swaps (CDS) tied to mortgage bonds.

I'm halfway through Greatest Trade Ever now, and Lewis' account of Burry's subprime trade should prove to be an engrossing companion piece to Zuckerman's book. You may even want to print the VF article out, as it's a lengthy excerpt from Lewis' book.

John Carney: how AIG destroyed itself

I am checking out John Carney's recent Business Insider piece on the collapse of insurer AIG.

Here's an excerpt from Carney's description of "AIG as a buyer of risk" from, "The Untold Story of How AIG Destroyed Itself":

"AIG’s financial products division became what is known on Wall Street as a “synthetic buyer” of a variety of asset backed securities, including mortgages and infrastructure linked bonds. AIGFP would sell credit default swaps that performed for the company much like an ordinary bond would for a bond investor.

As long as the insured bonds were performing, AIG would receive a regular revenue stream from the buyer that mirrored the regular payments of interest and principle that a bond holder would receive. AIG was able investing in the bonds without actually having to buy them..."

Carney goes on to note that AIG had, in effect, taken a synthetic long position in these mortgage bonds by insuring the asset backed securities and writing CDS (credit-default swaps) against them. This gave AIG a regular stream of profits from CDS buyers, though it exposed the firm to huge financial risk (and we all know how that played out).

To further illustrate this point, here's a passage from Greg Zuckerman's new book on the short subprime trade, The Greatest Trade Ever (page 87):

"...Credit-default swaps were tied to actual mortgages - but the number of insurance bets on the subprime loans now were essentially unlimited.

Finally, Burry and other housing skeptics had a way to short the market, while those who were bullish, such as insurance giant AIG, could make extra money by selling the insurance, confident they would never have to pay out. Their acutaries produced sophisticated models that showed the chances of a housing meltdown were minimal".

Ever notice how often references to such "sophisticated models" spring up in the past decade-plus' chronicle of hubris and folly?