원문 보기
In 2005, Michael Burry began paying Wall Street banks for protection against mortgage bonds he believed would fail. By December 2006, he was considering liquidating his fund. The crash he expected was still ahead. The mortgage documents gave him a reason to hold on. But would the trade pay off before the pressure forced him out?
Long before his story appeared in The Big Short, Burry ran a hedge fund called Scion Capital. As American house prices climbed, he studied the loans financing those purchases. The reassuring picture was easy to see. Houses were selling, mortgages were getting approved, bonds backed by those mortgages carried ratings from established agencies.
Burry looked beneath those labels. He found loans with little verification of income, borrowers with almost no equity, and payments designed to start low before rising later. To understand why that mattered, follow one payment. A household pays its mortgage. That loan sits inside a pool of mortgages.
Money from the pool flows to investors who own the bonds backed by it. However complicated the paperwork becomes, the money still has to come from someone opening a monthly bill. Take a simplified example with round numbers. A household can just manage a mortgage payment of a thousand dollars a month.
For two years, it pays on time. Then the introductory period ends, and the payment rises to $1,300. That's another $3,600 a year. The household's income hasn't changed. The loan looked healthy yesterday. Today, the same family in the same house can't cover the bill. During the boom, rising house prices offered an escape.
A more valuable home helped borrowers refinance into a new mortgage, replacing a payment they couldn't sustain. But what happens the house stops gaining value? The lender can refuse the new loan. The old payment still rises. A family that expected to refinance now has to find that extra $300 every month.
Burry saw this dependence inside the mortgages he was studying. Many had introductory rates lasting roughly 2 years. Loans made in 2005 had trouble built into their calendars. When a household misses a payment, the loss doesn't hit every bondholder equally. Mortgage pools were divided into layers with different protection against losses.
Picture a building with floodwater rising from the bottom. The higher floors stay dry longer. Burry targeted vulnerable layers. The water didn't have to reach the roof. Enough missed payments could damage those bonds while many homeowners elsewhere kept paying. The system kept producing loans because there was money to earn along the way.
A could collect a fee and sell a mortgage onward. The borrower still had decades of payments ahead. The person arranging the loan had already been paid. Burry wanted to bet against the weak bonds directly. So, he started calling banks. Credit default swaps already existed. These contracts let a buyer pay premiums for protection against specified credit losses.
But the mortgage bond trade he wanted wasn't available to him off the shelf. He pressed banks to develop it. In 2005, he worked with Deutsche Bank on contract language and began trading. The banks were helping build the instrument he would use to bet against the mortgage market. He didn't need to own the bonds.
He paid for protection on selected bonds, and the seller took on the obligation to pay for losses covered by the contract. If demand for that protection increased, he could also sell his position at a profit. But there was a catch. Waiting cost money. Each premium payment reduced the cash available to keep going.
A mortgage could look weaker this month than last month, and Burry could still have another bill to pay. If the bonds held up, he risked paying for protection he never needed. By November 2006, his mortgage swaps covered about 1.7 billion dollars of bonds. That was the amount protected, not the cash he had spent.
In a letter that month, he identified the second half of 2007 as the period of greatest expected stress for the mortgage pools he had targeted. His forecast had a date, but the premium bills were arriving already. Borrowers were falling behind even before their introductory rates expired. The resets threatened to add pressure to loans that were already in trouble.
The banks on the other side of the swaps supplied the valuations. Burry disputed their prices. Worsening mortgage performance wasn't translating into the higher valuations he expected for his protection. By late 2006, investor pressure was threatening the fund itself. Investors [snorts] demanded withdrawals and threatened lawsuits.
Burry cut salaries, laid off staff, and closed his Hong Kong office. In December, he considered liquidating the fund. Instead, he sold credit default swap contracts he had previously bought on corporate debt. Those contracts covered billions of dollars of bonds. Selling them helped preserve the mortgage trade, but holding on had consequences for his business and the people working there.
Other investors also saw the danger. One correct prediction doesn't make anyone a reliable guide to the next crisis. Burry still needed the evidence in the mortgage payments to turn into a price at which he could exit. By late July 2007, valuations were moving sharply in his favor. The protection could now be turned into cash.
Burry sold most of his swaps during 2007. In early 2008, he auctioned the remaining contracts to banks desperate for protection. Michael Lewis later reported the result. $725 million for Burry's investors and $100 million for Burry himself. The trade had survived long enough to pay. Describing his investors reaction, Burry told Lewis, "It was very quiet.
It was extremely quiet." The documents had contained a warning long before the gains appeared on the statements. Reading them gave him an argument. Financing the wait allowed him to collect on it. The useful lesson is a method you can apply to a much smaller decision. Follow the payment. Trace a financial promise back to whoever must supply the money.
And ask what happens if the favorable conditions disappear. For our household, the test was whether $1,300 could come out of an unchanged salary. A rising property price had made that question easy to postpone. Refinancing had made it feel unnecessary. The bill eventually made it unavoidable. A rating agency could approve the bond.
A bank could sell it. Neither could put another $300 into the family's monthly budget. Consensus cannot make a mortgage payment. If one of your own financial plans depends on favorable conditions lasting, how much time would you have if they stopped?
댓글 0