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In the mid-2000s, almost everyone on Wall Street believed housing prices would keep rising. Michael Burry saw something completely different, and he was willing to bet millions of dollars on a collapse that seemed almost impossible. Burry wasn't a traditional Wall Street insider. A former physician who had become an investor, he founded Scion Capital in 2000 and built a reputation for digging deeply into financial statements rather than following the crowd.
Then, he started studying the American housing market. What caught his attention wasn't simply rising home prices. It was the mortgages underneath them. Burry discovered that many risky subprime loans were being bundled into mortgage securities that received extremely high credit ratings. To him, the numbers didn't make sense.
SEC But spotting the problem was only half the battle. Burry wanted to bet against the housing market. The problem was that there wasn't a simple way to short individual mortgages. So, he turned to a relatively obscure financial instrument, credit default swaps. Essentially, Burry could pay premiums for protection against mortgage securities failing.
If those securities collapsed, his contracts could become extremely valuable. Beginning in 2005, Scion built enormous positions against specific subprime mortgage securities. And then something unexpected happened. The trade started losing money. His investors became frustrated. Why was their money being used to bet against a housing market that still appeared healthy?
Burry eventually restricted withdrawals from the fund while he waited for his thesis to play out. Vanity Fair For months, Burry looked wrong. Then the numbers started moving. As housing conditions deteriorated, mortgage delinquencies increased, and subprime securities began suffering major downgrades.
By the middle of 2007, the environment had changed dramatically. SEC And this is where the story takes its unexpected turn. The trade Burry had been criticized for suddenly became enormously profitable. According to reporting based on Burry's fund records, Scion's original investors ultimately saw a gain of roughly 489% from the fund's launch through June 2008 after fees and expenses.
Vanity Fair Meanwhile, the crisis spread far beyond Burry's fund. The collapse of mortgage-related assets helped trigger a financial catastrophe that shook banks, insurers, markets, and economies around the world. Credit default swaps themselves became a major source of systemic risk. SEC Burry wasn't the only investor who saw the housing bubble.
But his story became famous because he was willing to endure years of doubt before the evidence proved him right. So, was Burry simply brilliant? Or was he willing to stay wrong longer than everyone else could tolerate? What do you think? Let me know in the comments, like this video, and subscribe for more stories hiding behind the biggest moments in financial history.
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