Hedge Fund Manager Who Foresaw Crash Asks Why Greenspan Didn’t

Michael Burry, a Bay Area-based hedge fund manager, argues that not only did he foresee the crash in the US housing market –

he successfully used credit default swap derivatives to protect himself and his clients from going down with it.

Michael Burry, a Bay Area-based hedge fund manager, argues that not only did he foresee the crash in the US housing market –

he successfully used credit default swap derivatives to protect himself and his clients from going down with it.

Michael Burry, a Bay Area-based hedge fund manager, argues that not only did he foresee the crash in the US housing market –

he successfully used credit default swap derivatives to protect himself and his clients from going down with it.

Given this, he argues Alan Greenspan is either hopelessly wrong or lying when he claims no one foresaw it: “academia, the Federal Reserve, the regulators”.

Well, we’ve talked previously about how conventional academic economics is a disease, so no surprise they they missed it 😉 . [br]

And we all know not just the Cheney / Bush regime, but their predecessors Clinton / Rubin / Summers / Geithner came down hard on the one regulator who DEFINITELY saw it coming:

the head of the Commodities Futures Trading Commission, Brooksley Born, whom they all made sure was basically frozen out of the loop and publicly humiliated.

And since the privately-owned Fed has always been a “go along to get along” scheme since its inception in 1913,

especially when captained by Greenspan, an acolyte of serial-killer-loving Ayn Rand, who apparently genuinely thought ” the market always knows best”,

that’s hardly much of a shock either.

But that no one has even ASKED Burry about his analysis in the time SINCE Black September 2008 … well … that says something – not good – about the level of both intellectual curiosity and moral integrity at large in American elite circles to this very day.

From the New York Times:

Back in 2005 and 2006, I argued as forcefully as I could, in letters to clients of my investment firm, Scion Capital, that the mortgage market would melt down in the second half of 2007, causing substantial damage to the economy.

My prediction was based on my research into the residential mortgage market and mortgage-backed securities.

After studying the regulatory filings related to those securities, I waited for the lenders to offer the most risky mortgages conceivable to the least qualified buyers.

I knew that would mark the beginning of the end of the housing bubble; it would mean that prices had risen — with the expansion of easy mortgage lending — as high as they could go.

I had begun to worry about the housing market back in 2003, when lenders first resurrected interest-only mortgages, loosening their credit standards to generate a greater volume of loans.

Throughout 2004, I had watched as these mortgages were offered to more and more subprime borrowers — those with the weakest credit.

The lenders generally then sold these risky loans to Wall Street to be packaged into mortgage-backed securities, thus passing along most of the risk.

Increasingly, lenders concerned themselves more with the quantity of mortgages they sold than with their quality …

At the same time, I also watched how ratings agencies vouched for subprime mortgage-backed securities. To me, these agencies seemed not to be paying much attention.

By mid-2005, I had so much confidence in my analysis that I staked my reputation on it.

That is, I purchased credit default swaps — a type of insurance — on billions of dollars worth of both subprime mortgage-backed securities and the bonds of many of the financial companies that would be devastated when the real estate bubble burst.

As the value of the bonds fell, the value of the credit default swaps would rise.

Our swaps covered many of the firms that failed or nearly failed, including the insurer American International Group and the mortgage lenders Fannie Mae and Freddie Mac.

I entered these trades carefully. Suspecting that my Wall Street counterparties might not be able or willing to pay up when the time came, I used six counterparties to minimize my exposure to any one of them.

I also specifically avoided using Lehman Brothers and Bear Stearns as counterparties, as I viewed both to be mortally exposed to the crisis I foresaw.

What’s more, I demanded daily collateral settlement — if positions moved in our favor, I wanted cash posted to our account the next day.

This was something I knew that Goldman Sachs and other derivatives dealers did not demand of AAA-rated A.I.G.

I believed that the collapse of the subprime mortgage market would ultimately lead to huge failures among the largest financial institutions.

But at the time almost no one else thought these trades would work out in my favor.

During 2007, under constant pressure from my investors, I liquidated most of our credit default swaps at a substantial profit.

By early 2008, I feared the effects of government intervention and exited all our remaining credit default positions — by auctioning them to the many Wall Street banks that were themselves by then desperate to buy protection against default.

This was well in advance of the government bailouts.

Because I had been operating in the face of strong opposition from both my investors and the Wall Street community, it took everything I had to see these trades through to completion.

Disheartened on many fronts, I shut down Scion Capital in 2008 …

[T]he signs were all there in 2005, when a bursting of the bubble would have had far less dire consequences, and when the government could have acted to minimize the fallout.

Instead, our leaders in Washington either willfully or ignorantly aided and abetted the bubble.

And even when the full extent of the financial crisis became painfully clear early in 2007, the Federal Reserve chairman, the Treasury secretary, the president and senior members of Congress repeatedly underestimated the severity of the problem, ultimately leaving themselves with only one policy tool — the epic and unfair taxpayer-financed bailouts.

Now, in exchange for that extra year or two of consumer bliss we all enjoyed, our children and our children’s children will suffer terrible financial consequences.

It did not have to be this way.

And at this point there is no reason to reflexively dismiss the analysis of those who foresaw the crisis.

Mr. Greenspan should use his substantial intellect and unsurpassed knowledge of government to ascertain and explain exactly how he and other officials missed the boat.

If the mistakes were properly outlined, that might both inform Congress’s efforts to improve financial regulation and help keep future Fed chairmen from making the same errors again.

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But then again, Michael, maybe not.