Michael Burry: Notes from Vanderbilt Speech
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.
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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
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April 12th, 2011 at 11:04 am
“noted that Silicon Valley is the only place where pure capitalism exists today”
What does “pure capitalism” mean? I use Silicon Valley as an example of liberalism in action–a place that wouldn’t exist were it not for liberal social and economic policies. Silicon Valley exists because liberals in the 1950s and 1960s built the University of California and California State University system that educated generations of scientists, engineers, and visionaries. It wouldn’t exist without the generation of liberals in the 1930s-1980, which invested vast amounts of tax dollars in pure and applied science that led to lasers and other innovative technologies. It wouldn’t exist without LBJ’s Great Society, which invested billions in K-12 education as well as Federal Student Aid.
Silicon Valley relies on liberal, democratic capitalism for its very existence.
April 12th, 2011 at 11:24 am
Here’s my take on this comment by Burry.
“He has bought some farmland, but for very specific factors including currency (didn’t really expand on this)”
Here’s my guess as to what/why he might be investing in farmland.
-IMHO the FED, etc are dealing with excessive debt (debt that can never be paid off; my definition) by inducing inflation and deflating the the value US currency. This is the only way the US can pay off the massive debt held by China, Japan, oil exporters etc.
-As the US dollar falls, exports of farm commodities do very well. Want to do something interesting look at US crop exports vs the US dollar. Strong correlation and yes I know correlation doesn’t mean causation.
-You’ve all heard about China, India etc. Economic growth build on populations of billions makes US crops look very attractive especially with a falling US dollar.
-Happy days are here again, down on the farm.
I knew there had to be a rainbow somewhere after the bankers and deregulators got done screwing this corportacracy or I mean country.
April 12th, 2011 at 11:53 am
Which branch in Canada?
April 12th, 2011 at 12:25 pm
So Barry, should you really fire your fund manager “when he suffer from style drift” ?
Getting rid of Michael Burry because he stopped focusing on equities and started shorting sub-prime CDS sound like an exception to your rule !
April 12th, 2011 at 12:29 pm
farmer1 – don’t count your chickens before they hatch .. theres that gas to plant, chemistry to hold down the bugs and barge river navigation thing to market … but I’m pullin for ya … go locals & ethanol – skyscrapers your on your own (kidding)
April 12th, 2011 at 2:14 pm
Hate to be the one to ask what is probably a dumb question….
But what are the benefits of opening a bank account in Canada?
April 12th, 2011 at 2:23 pm
A wise man
i with Burry on, say 50%, being skin in the game
otherwise you get the Magnatar type “eat the toxic tranche” then short the lenders 25X that
pay indigent 3% FHA down payments with a foundation “charity” so you can stuff them with 33X that?
hold 5% of a garbage loan? you make much more on the 20X spread that you securitize,
than you likely lose
understand every balance sheet item? whew, god bless him.
canada bank account has currency+ and is reliable in large size
April 12th, 2011 at 4:12 pm
‘Open a bank account in Canada.’
Has Burry actually tried to do this? Since he’s a large-scale trader, maybe he’s got a corporate account. But as an individual, unless you have a Canadian SIN (the equivalent of a U.S. SSN), you will get nowhere trying to open a Canadian bank account. And you can’t get a Canadian SIN without being a Canadian citizen, or else having a Canadian resident visa.
Same story with brokerages. I tried to open a Canadian-dollar denominated brokerage account in Toronto … but learned that it was just a front-end on a U.S.-based, SIPC-insured account with securities custody in New York — even for Canadian securities held in the account. Needless to say, this would be of no help in the event of a US dollar crisis or US exchange controls.
I would love to be proven wrong about the unavailability of Canadian accounts for non-Canadian resident US citizens — but I don’t think I am. Thanks to the U.S. HIRE Act of 2010 (Google it), Americans are international lepers when it comes to opening overseas bank accounts. One glance at the deadly blue passport, and foreign bank officers politely show you the door. Sucks, don’t it?
April 12th, 2011 at 4:51 pm
Pure capitalism? Doesn’t exist in the developed world… and probably for good reason. But I see lots of it in the developing world – small scale in local markets, which is exciting and creative, and large scale in oligarchies who “own the country”, which is corrupt and destructive. What we have here is regulated capitalism… or sometimes, as recently, under-regulated capitalism.
April 12th, 2011 at 5:00 pm
machinehead,
make it easier for People ..
http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Hiring+Incentives+to+Restore+Employment+Act+Foreign+Bank+Accounts+
aka H.R. 2847
April 12th, 2011 at 5:40 pm
I think the last item should be a mandatory lesson for every investment manager, read the prospectus cover to cover. The number of investment managers who fell for the salesmens blandishments leading up to the crisis is amazing, these folks actually got paid for not doing analysis. Sure things looked good on the surface, but take the lid off and its putrid inside. I fault the investment managers as much as the investment sellers. Recall the piece about Stavanger Norway and how it got caught. The folks on the town council did not understand the pig in the poke they were buying, but assumed the salespeople were trustworthy.
So to take the last line and run with it a bit, if you don’t fully understand what it is you would be buying just say no. Assume the salesperson only cares about their commission.
April 12th, 2011 at 5:55 pm
Mark E. Hoffer,
I’ll make it easier still for The People. The gist of the HIRE Act is that foreign financial institutions wanting to serve U.S. citizens need to sign up for an IRS reporting regime which is actually stricter than for domestic banks and brokers. Not only do they have to report annual earnings, but also the beginning and end-year account values. And this reporting regime can be audited for ‘compliance’ from time to time, with severe penalties for noncompliance.
Alternately, a foreign financial institution which serves U.S. citizens, but doesn’t ‘comply’ with the reporting regime, will face 30% withholding on its US dollar remittances from correspondent banks in the US. Obviously, 30% withholding on US dollar transactions is a ‘nuclear weapon’ which would quickly put foreign banks out of business.
So most (actually ALL, as far as I know) foreign banks are deciding simply not to serve U.S. citizens before the HIRE Act takes full effect in 2013. Some foreign banks already have notified U.S. customers that their accounts are being closed.
Why Canadian banks take this position is somewhat of a mystery, since Canada and the U.S. already exchange tax information. Nevertheless, just try opening a Canadian account without a Canadian SIN (Social Insurance Number). It’s a show-stopper, eh?
April 12th, 2011 at 6:52 pm
machinehead,
“That’s the ol’ Pepper~”
also, if one allows one’s self to ‘read between the Lines’, they’ll see that that Act is the beginning of stricter Capital Controls, no?
April 13th, 2011 at 7:09 am
This guy hit it out of the park. But alas in many ways, I’m a wallflower. Floating amongst the low risk but still happy to be alive ( in a financial sense) . Don’t laugh. There’s a WHOLE lot of you who go to bed every night “thinking” you’re alive in the game . hehehe.
How the heck would he know to put on those shorts? Lots of reading ahead. I wish I had the time. I’ll get to it.
Alas I live in a world where I’m often a month or two behind Have a great week.
April 13th, 2011 at 10:53 am
What is it going to take for some member of Congress or the Senate to introduce a bill to re-instate the Glass-Stegall Act!? It is so freaking obvious that consumer banks and investment banks need to be separated again. It is really pretty simple: 1.) announce that no new mergers can take place, 2.) issue a date – like July 4th of 2013 – when all banks who are not in compliance need to spin off those operations. Done! There is no coincidence that we had no problems like 2005-2008 for 70 years, then Phil Gramm introduces a bill eliminating GS in the middle of the night, Clinton approves, and financial armageddon ensues.
Glass Stegall II needs to become a movement.
April 13th, 2011 at 12:38 pm
franklin411,
The biggest trailblazers in Silicon Valley are college dropouts, and of those that even went to public school K-12 they largely worked on their own and completely ignored lesson plans. The best “pure capitalism” aspect of Silicon Valley is the fact that the ability to code and run a business, things largely learned on ones own and not in school, are the most prized possessions. Status seeking and credentialism that is so central to the government promoted university system takes a back seat to pure ability, which is largely a function of individual effort.
The government helped create the internet, congrats. That doesn’t mean its responsible for all the billions of man hours people have put into it over the years.
April 13th, 2011 at 12:53 pm
Sounds like the guy was just “short everything” and got lucky.
5-yrs earlier… he would’ve been in the same trade and a very poor dude. No real process here. No real intellect.
April 17th, 2011 at 4:26 pm
We will be resiting the crisis. Nothing has changed. The gov’t engineers bubbles and props up the big institutions thinking that’s the only way out of the previous crisis.
Consider
*Courtesy the Fed the banks borrow in the Fed funds market @ 5 bps and park money at the fed earning 25bps, while Main Street earns 0% on their savings
*The Fed is engineering a wealth effect via QE2
*The gov’t refutes true capitalism, by agreeing to have a huge unprecedented concentration of financial assets
via a few large banks
And this is all done at the expense of the greater economy. Burry is right that we are monetizing the debt.
We get no interest on our money so banks can continue the great carry trades that help them rebuild equity while the U.S. dollar continues to depreciate against currencies and commodities(our fiat currency does not buy what it used to)