This action might not be possible to undo. Are you sure you want to continue?
. I know you know lawmakers have spent a lot of hours trying to get to the bottom of what led to the financial crisis in the first place. Do you think it has been a productive effort on -- on their part so far? MICHAEL BURRY: Well, I think it's difficult for -- for Congress to really get a handle on this. I think it's such a partisan environment and they need to -- and I think they need to be so aware of -- of -- of what their positions ought to be that it's a little bit difficult. I've seen what could -- the most significant development is really the -- the empowerment of the Fed in the wake of all this, which is a little surprising. The Federal Reserve, in my view, hadn't seen this coming and -- and in some ways, possibly contributed to the crisis as a -- and -- and what we're seeing coming out of this is, is Congress saying we don't know how to -- to regulate this. We don't know how to prevent this from happening. Let's empower the Fed. The Fed can -- they can -- now they can look over thrifts. They can do this and that and the other. I'd have to have a special pneumonic to -- to remember all the different powers the Fed got. But they've thrown it to the Fed and now Bernanke is the most powerful Fed chairman in history. I'm not sure that's the -- the right response. That -- the result tends to tell me they're not -- they're not getting it right. ERLICHMAN: What's the danger of having more power for the Federal Reserve? BURRY: Well, I don't feel that the economic theories and policies that got us into this mess are the same policies and theories that will get us out of this mess. And more to the point, I don't -- I'm 100 percent sure that the policies and theories that got us into this mess won't prevent the next mess from happening. And that's probably my biggest frustration with the whole process. I don't think that -- I think with all the blame on Wall Street and all the focus on Wall Street -- the increase -- the perp walks for Wall Street -these things, in a lot of ways, are non -- are not very productive. I think it's not very productive to blame a narrow set of individuals or a narrow set of institutions. Nobody is taking time to blame anything that anybody in Congress did or the Fed did or the other businesses, you know, how the banks acted, how the mortgage brokers acted, how people acted, how borrowers acted. There's -- there's a lot of blame to go around. And I think this blame game being oriented entirely toward Wall Street is -- is not overall helpful. ERLICHMAN: Alan Greenspan is aware of at least some of your views on Fed policies. As you know, Bloomberg's Al Hunt asked Alan Greenspan earlier this year -- and Greenspan called your insight, looking back, the insights you had heading into the housing crisis, as a, quote, "statistical illusion." How did you feel about those comments? BURRY: Well, I have to say, I understand. He was crowned the maestro about a decade ago by Bob Woodward. And, you know, in -- in those -- in 2003, he said that national bubbles in real estate don't happen. In 2004, he counseled Americans to in -- to that -- that they're overlooking adjustable rate mortgages, that they should favor adjustable rate mortgages in their financial plan. In 2005, he touted the technology advancements that are making credit available to people who otherwise would not receive credit. And these technology advancements are the same -- that same sort of language is used by IndyMac, New Century, Ameriquest, these subprime loans that ended up failing spectacularly. And, you know, those names and a little bit -- they're a little bit dwarfed or eclipsed by the other big names. But the -- what I've seen -- what I saw was a Fed that crashed rates from 2000 -- the beginning of 2001 to 2003, it took rates from 6 percent or so down to 1 percent. In that time frame is when we fir -- we saw the -- the divergence where income diverged from home prices. So when you look -- if you chart income -national income or the -- home prices started to diverge in 2001.
You know, I think that this was a policy of his, that had gone on pretty much almost entirely -- his entire tenure. The Greenspan put (ph) was established back in the late '80s -- the Mexican crisis, the Asian crisis, the Russian crisis, the long-term capital, the -- the dot-com blow up, 9/11, the accounting scandals, the -his response all along was to -- to lower rates. And then, ultimately, when lower rates were no longer goosing asset prices, he did not see how the types of mortgages that were being introduced further accelerated the housing price game. ERLICHMAN: So what are you getting at, that Alan Greenspan should come out and say I am to blame, I should take a lot of the blame for the housing boom and subsequent bust? BURRY: I think it's beyond the capacity of 99.9 percent of humans on this earth to reject their legacy in that manner, to -- to completely bury themselves for all the rest of history. I think it's very difficult, especially you've had a -- a long and -- and illustrations and as an acclaimed career as Greenspan has had. So I don't expect him to say these things. I think it's just important that people recognize what helped get us to the point we're at today, which is a very bad spot. ERLICHMAN: What about you? Earlier this year in a "New York Times" op-ed, you said: "Nobody in Washington has wanted to hear your side of the story." Is that still the case, that nobody in Washington has called you to ask for some information on how we avoid this happening in the future? BURRY: Well, in -- after the op-ed was published, I was contacted by the FSA -- FCIC. And I actually went to Washington and -- and spoke with them for a bit. And -- and so -- so that has happened at this point, yes. ERLICHMAN: And what did they ask you? What kind of questions did they ask you? BURRY: It was largely what caused -- you know, it was largely a question as to what caused the crisis, largely, in, you know, over about two hours, variations -- variants on what caused the crisis, what -- and my actions through it... ERLICHMAN: (INAUDIBLE)... BURRY: -- in terms of shorting the market. (OFF CAMERA REMARKS) ERLICHMAN: So you went Washington, spoke with members of the FCIC for a couple of hours. They got your input and what did they do in -- with that information now, as far as you know? BURRY: Oh, I don't -- I'm not privy to that information. ERLICHMAN: But do you -- do you feel like, at this point, at the very least, lawmakers have reached out to you to get your opinions on how this (INAUDIBLE)? BURRY: I don't -- not to the extent they could have and certainly not in a way that would encourage my cooperation. I think that ideally, it would be an informal chat. It wouldn't be a -- a demand for documents or anything like that.
ERLICHMAN: We talked about Alan Greenspan, but what about Warren Buffet, someone who was at an FCIC hearing earlier this year, when he said you and John Paulson saw this housing bust coming but who was going to listen to you back in 2005, which goes back to something you said earlier. It's a fair point. BURRY: Well, you know, my mother became a real estate agent in 2005. And it's -- it's tough. It's tough. You know, it's no fault of hers. I mean and it's a -- I had business partners didn't listen to me. I had employees that didn't listen to me. A lot of my investors didn't listen to me. You know, perhaps I'm not a very persuasive person. But you're -- it's correct. Nobody -- nobody was listening at that time. I shouldn't say nobody. There were a few that were. But by and large, it was not an easy sell in 2005. ERLICHMAN: Let's talk about the Wall Street players, Goldman Sachs, for example, the role that firms like Goldman played in all this. You worked with Goldman. They helped you with your trades all the time. What did you make of the SEC suit against Goldman Sachs earlier this year? BURRY: I think that -- my first thought when I saw that -- it was on a Friday, I think, it was announced. My first thought was they're looking for a scapegoat. And they found some young trader in France and he's probably got some fabulous e-mails and they -- and they've dug through them and found a scapegoat. That was my thought. The SEC is -- has -- has been absent for a long time. They haven't done much of anything that's very helpful for -- for investors, in my view. And now they're going after Goldman Sachs. It was a par -- I think it's a -- there's a -- I think it's a response to some political pressure and -- to find a scapegoat. That's what I thought. ERLICHMAN: But at the same time, Goldman has always maintained that it acts and acted in the best interests of its clients. You were a Goldman client. Did you find that to be the case? BURRY: I don't believe that -- I don't believe that any Wall Street bank always acts in the best interests of its clients. I -- I think that's false. I think that I fought Goldman a lot. And not just Goldman. I fought all my counter parties a lot. It's an incredibly vicious, incredibly competitive world when you're going to go take a position opposite one of those banks. And I think -- and I think that it's not whole -- a whole lot better -- I think even if you just want to buy a corporate bond and you call up a bond broker, I think you need to be aware that that bond might not -- it -that the advice you're getting might not be in your best interests and turn -- and that bond could be coming out of the broker's inventory. There's a lot of -- there's a lot of issues that could come -- come into play. ERLICHMAN: Goldman has now settled that suit, while the suit was... BURRY: Predictably. ERLICHMAN: Right. Ongoing during that suit, they announced -- the board announced that they were going to set up a special committee so that even though we believe we are always acting in the best interests of clients, we're going to make sure that there's a committee that's looking out for clients. So this is something they're doing to avoid any news out there that they're not acting on behalf of their clients.
Do you think that's a positive step? Does it make a difference at all? BURRY: I think it makes no difference at all. I think it makes no difference at all. I think, you know, the way Wall Street works, they are interested in getting a stream of fees -- an annuity of fees coming off their clients and they want to trade around on top of that for some extra return. And it's more complicated than that, but that's basically it. I think, too, that -- that Wall Street is a pretty clubby place. I don't think that Wall Street competes with itself very well. And so a lot of those fees and a lot of those practices are not -- well, whether it's the fees they charge, whether practices in advising clients or -- or trading client securities, there's not enough, in my view, of a market mechanism to rein them in -- competitors who would do a better job, for instance... ERLICHMAN: Had... BURRY: And that's really what would rein them in, in my view. ERLICHMAN: I have to ask, when you first learned about that SEC/Goldman suit, did you wonder, oh, are they going to -- are they going to come after me? Am I going to get -- be getting a call from the SEC for -- for my role? BURRY: Well, my -- my view was that they probably went through an awful lot of Goldman e-mails and this is all they could come up with. You know, and I thought they -- they will -- I -- I was afraid that I would get a request for all my e-mails and then they would just go through everything to find -- you know, I thought -- I had -- I'd be lying if I said I wasn't afraid at some point that they'd come after the short sellers. That was -- that was a concern of mine, I think, in May of 2008 I first expressed it to my general counsel, that -- this was when Bear was charged. I think it was about May or June that -- when those managers at Bear were charged. And I thought that was a raw deal. I wasn't privy to anything there, but I just -- it -- it felt, again, more like a scapegoating mechanism. So I started to fear it then. And, yes, it's been a concern. ERLICHMAN: But the SEC never contacted you? BURRY: Not yet. ERLICHMAN: But it does go back to that question, what -- what was your role or the role of others like you in the crisis? In other words, if there hadn't been investors making the types of bets that you were making -- buying credit default swaps and then all of a sudden putting this tremendous pressure -- knowingly that they were accepting it, but firms like AIG ultimately ended up with -- do you look back and think I contributed in some way to this or no? BURRY: Oh, I -- I don't think so at all. I think that the number of players -- and even when you look at Paulson, I mean the -- I think when you get into Paulson and Magnetar, the size is quite a bit different. But -- but still, the size of this market was immense -- much bigger than these players and -- and it's much bigger than me. I was a 600 hundred something million dollar fund I had a couple billion on, you know, in terms of the short. It's -- that was -- that was nothing relative to the market. So, one, I don't think that, you know -- I think we're also getting at a bigger question, which is how much are derivatives to blame for the crisis we're in.
And I think that there's really two parts to that. Derivatives certainly in -- increased the indecision of the dealers and insurance companies and helped drag the system down when everything went bad. Would -- it's a fair question, though, would housing prices have gotten as high as they did, would they have fallen as far as they have, would jobs have been lost like they did even if we didn't have derivatives? And I think quite possibly. I don't think that derivatives caused our economic crisis. I think, yes, it caused some of these bailouts that we've had to do of AIG and these sorts of things, which are a huge cost to the taxpayers. But the nut of it is that our economy was headed in a certain direction. No part of my thesis on why and when it would happen -- it would come down had anything to do with derivatives. ERLICHMAN: What about something else that's happening on Wall Street? Bloomberg has reported that Goldman Sachs is shutting down its proprietary trading business and that there are other firms that are thinking of making that kind of move, too. Is that the kind of move that makes Wall Street safer, if it's not trading for its own book, it's getting... BURRY: Absolutely. I think that brokers should not trade for their own account in securities -- and securities that are also available to their clients. I just don't think that's pa -- that should be done. I think broking should be pretty boring -- safe, boring, low return business. And I think the same is true for banks. They should be very safe, solid, indestructible businesses. And so there are -- some of these seemingly Draconian measures, I think, do need to be taken. ERLICHMAN: So Wall Street is going to be a lower return business? BURRY: Well, I'd like to see the -- you know, I -- I'd like to see how the -- the destruction of those proprietary trading desks really works out in -- in the real world. ERLICHMAN: What about the future of the hedge fund industry? Stan Miller's decision to close up shop recently got a lot of attention. Do you think we're going to see other announcements from other players in the hedge fund industry? BURRY: You know, I'm not sure. I would say that being a hedge fund manager is not -- it's not something that goes off well with your -- your, you know, the parents at your kids' school and that sort of thing. It's not something that I think has the same kind of cachet and -- and it doesn't -- and it actually attracts some derision. And so I think maybe that affects some things. I think that every manager -- and I know this was the case with me. And I've talked with a number of other managers. I haven't spoken with Doug & Miller but I think I saw it in a report. The interaction with the clients becomes dissatisfactory. And when that -- when -- when your -- your customers -- your interaction with your customers is no longer satisfactory, a lot you're -- why -- why go to a -- you know, once you've made some money, why continue to do it? And I think that's going to -- that's at work, too. ERLICHMAN: But the interaction is not satisfactory, why? Because the returns aren't what they once were? Is that...
BURRY: The demands for transparency, the focus on volatility month to month, week to week, performance reporting; the complete lack of patience on the part of many hedge fund investors. Also, the -I think people forget, for a -- they think, oh, hedge fund managers are rich and they're powerful and they're always happy. And that is not true. They're -- when -- when they're down, hedge fund managers, you know, at least the ones I know -- feel it every bit as much as -- as -- as their clients, or worse. And it's a -it's a -- it's a tough emotional roller coaster to manage. ERLICHMAN: But what about fees? You always had a different view on what, as a hedge fund manager, you should be charging, than a lot of the hedge fund players on Wall Street. And it raises the question, can the model that exists today for what hedge funds charge continue going forward? BURRY: I believe that it should -- it should con -- you know, it should be allowed to continue. I don't think that there's anything inherently wrong with -- with a carry provision -- a 20 percent carry, that sort of thing. I think that, you know, charging on very high asset management fee and charging a 20 percent carry isn't the right way to go. But I think it should -- there should be some provision or law for a manager -- a money manager to set up into private contracts with other private citizens who are credited or sufficiently sophisticated and enter into whatever terms -- you know, I mean I think, you know, there -- there are hedge funds who have super high fees and super high -- super high carried interest and a super high asset management fee and they've done really world, some of the most successful ones. So -- and their clients are very happy. So I -- I don't think there's anything inherently evil in that -- in that scheme. ERLICHMAN: At the end of the day, it sounds like you're not all that impressed with our response so far to the financial crisis, that more could be done. And given where we are now and what's already on the table, what are the implications of our response? BURRY: I think that we're -- by not learning the lessons we needed -- we needed to learn we're essentially dooming ourselves to repeat. It's -- it's that simple. It's, you know, now and I -- I may be a little confused on your question. Could you ask it again? ERLICHMAN: Yes. I think the question that people want to know about is if -- if we're not getting it, if -if we're gathering information but we're not learning from the financial crisis, then what are the long-term implications? In other words, what are you worried about right now? If -- if we haven't... BURRY: Well, there's been a -- there's -- my number one concern is there's been a complete, utter, totally abdication of personal responsibility throughout our entire society. I don't think that anyone anywhere is taking blame themselves for what they did to contribute to the crisis. And I think that -- again, it gets back to that blame game. I think that's -- it's the most damaging thing we can do, as a country, is -- is to blame a narrow set and not look within ourselves for what each of us did or didn't do to -- to basically -- wrong that led to this mess. Go ahead. ERLICHMAN: You're saying from the average mortgage broker all the way up to the Federal Reserve?
BURRY: From the borrower through the average mortgage broker all the way up to the Federal Reserve, through Congress, the president -- several presidents. I think there's -- there's -- this has been coming for a while. And there's been a -- a lessening of the credit standards over a period of time that's ultimately led to the kind of blow off top that we had. ERLICHMAN: Well, then, what's your take on the housing market right now and what's going on in the housing market right now? BURRY: It's -- it's an artificial market. There's -- there are a tremendous number of homes where the homeowners -- I think it's 2 point -- somewhere between 2.5 and three million homes where the homeowners are more than nine months past due and are not getting notices that they're past due. They're just living there for free. I actually know one that's been there for a few years without having to pay anything. There's this tri -- and the re -- and I think that Fannie and Freddie are basically being used for special purpose vehicles by our government to support the housing market. The private mortgage market is practically non-existent. Ninety-six, 97 percent of mortgages are -- are flowing through Fannie and Freddie now. It's -- I think Fannie and Freddie are in -- are -- are exercising a tremendous amount of power over the -- the market by withholding properties from sale and not making -- and not forcing foreclosure -- the foreclosure process. I think that it would be best if the government just completely got out of the mortgage market and let -- and let the housing -- because home prices are a function of income and -- and the leverage applied. Everybody buys these with credit. So this -- we need -- I'm sorry. I lost my train of thought. ERLICHMAN: That's OK. Do you want to take it over -- do you want to start again on the housing question or do you want to -because I could kind of -- I could ask you a follow-up, which is based on what -- based on what you just said about the housing market, that it's an artificial market, then what's -- what's this mean for the economy? BURRY: Well, I think that we've -- we've had this massive inflation of this -- of this asset, housing, on the back of easier and easier credit. And it's so-called -- it's a credit induced asset inflation, which we've seen before. The consequence is deflation in that asset when it -- when it bursts. In this case, over 65 percent of people own homes. This was -- this was an asset that the nation participated in in a big, big, thorough, broad fashion. I honestly think this is the biggest bubble, the biggest -- the most significant bubble, essentially, that the world has seen. And I think -- I don't think there's going to be another one that we're going to see that's -- that's even bigger. Some people have maintained Treasuries but I think that -- so we're going to deal with that overhead. It's an incredible deflationary force being applied to our economy. And we've got the Fed doing -- you know, the government doing everything it can to stimulate with monitoring fiscal policy. And we're leveraging ourselves to do it. What's really important, too, it's a little bit of an artificial economy as well as an artificial housing economy because we're not paying for this yet. All those bailouts, all the stimulus, all this money we're printing, this isn't hitting us yet. It's like we're a teenager and we've got depression and our parents have given us a credit card and said cure -- go cure your depression. And it's not being made clear, we have to pay this back at some point. Taxes haven't gone up. Services haven't been cut. We're spending more every -- more. We're not raising taxes. We're -- at this point, we're not feeling the impact of all the borrowing we've had to do to save all these institutions and to support the economy to this point.
We're making -- again, we're making the same mistake. I don't see, you know, because I -- now, because the Fed has been -- I think the Fed can keep rates very low. I think it has a tremendous power to keep rates low. But it didn't help Japan. I don't know if we're any different than Japan 10 to 15 years ago. We're basically using the same tools to fight the same problem. Look at where Japan is now. They have the highest debt to GDP ratio of any country, because it's suicidal to raise rates when you have the debt load -- when the debt loads get so high. So I think you -- what do you have? Three billion in the EU, $2.5 -- I'm sorry -- $3 trillion in the European Union, $2.5 trillion that's in corporate debt in the U.S. coming due by 2013. There's an election cycle. Obama is going to be up for reelection. And I think politics influend -- influences it tremendously. I think the stimulus, the monetary stimulus, the fiscal stimulus will -- will continue through that point and at least and -- and so in the -- over the next few years, I -- I'm not really seeing much change from what we've been experiencing. ERLICHMAN: So whether you support it or not, you think the Federal Reserve is going to go for what they like to call QE2, another round of quantitative easing? BURRY: Absolutely. Absolutely. That -- I think that's -- that's the history of the Fed since Volcker. I think that -- yes, well, anyway. ERLICHMAN: Well, you know, there are people on -- you mentioned Japan. As for U.S. economy, there are a lot of people who say one day maybe the U.S. economy or the United States will lose its AAA credit rating. You're the guy that everybody knows is the housing market bear. Are you a bear on the U.S. economy? BURRY: Well, it's tough. I mean you look at our $1.5 trillion deficit and you're -- we're assuming that there's going to be growth in the economy that's going to basically help us dig our way out to -- you know, a better -- a better annual budget picture in a few years. And I -- and I -- and I don't think that's going to happen. I think we're -- and we're going to -- unless we reduce taxes or cut our spending tremendously, we're going to be facing a crisis of confidence in the -- in our credit. It's really interesting, you know, the -the Chinese government owns -- and when I say credit, in -- in our Treasury. I -- the Chinese government owns around $900 billion of U.S. Treasuries. That's roughly the amount of income -- all the per income -- personal income tax collected from all Americans every year. The numbers are getting so big that you don't just think of it as an easy tax -- a tax increase on the -- on personal income tax will solve the problem. It can't. You raise a few extra hundred billion. It's -- it's not going to change the big picture in any way. What are we going to do as a country to -- to solve our problem with this massive growing debt, our massive deficit, the fact that our economy just doesn't seem to want to get off the ground? And, you know, there's no good answer. It's a giant gamble, in my opinion, to leverage our future and our kids' future and their kids' futures to -- to try to get out of this. I think it's a giant gamble. And -- and I don't think it's a very good gamble. I think that it's very difficult to predict exactly which way it's going to go, but I don't think it's a good gamble. ERLICHMAN: We're going to take a 20 second break if you want to grab a... BURRY: Sure.
ERLICHMAN: -- a sip of water. (OFF CAMERA REMARKS) ERLICHMAN: All right. Anyone who has read Michael Lewis' book, "The Big Short," knows that you shut down your hedge fund in 2008. You can read it on your Web site -- but you're still investing your own portfolio, correct? BURRY: Correct. ERLICHMAN: How do you find your investment ideas? BURRY: You know, I -- I -- I essentially just read news. I search. I -- I say -- I'm reading a lot. I read a lot of news. And, you know, I rarely use screening tools. I basically follow my nose and -- on news stories. And -- and, you know, more often than not, it's a dead end, but sometimes it produces something of value. ERLICHMAN: And how much time -- how much news will you read before you find that idea that you really want to go with? BURRY: It's -- that's really hard to quantify. I -- I literally am always -- I'm addicted to it, so I'm always doing it. It's really difficult to quantify, I'm sorry. But it's -- it's not very common and it, you know, it's -it's tough to find really good ideas. ERLICHMAN: OK. BURRY: The correlation has essentially been unity for a long time in the markets. Basically, all assets seem very correlated. And, you know, it's -- well, that's not the biggest reason. The biggest -- you know, it's just that I'm interested in finding investments that aren't just simply going to float up and down with the market. And -- and so the incredible correlation that we're experiencing -- we've been experiencing for a number of years is -- is problematic. I think, though, that there is opportunity. I mean basically the financial economy has gone big. We bail -you know, by all these bailouts basically created these giant -- certainly too big to fail now institutions. And -- and the smaller banks are fail -- are the ones that are failing, you know, every week. Smaller hedge funds are going out of business because nobody trusts the small ones. They all want to go with the big ones. All this is draining liquidity and draining some of the demand for smaller and micro cap stocks and smaller issues of bonds and that sort of thing. And -- and it -- investing personally, that's where I dig around most of time. ERLICHMAN: Are you making money these days? BURRY: Yes. You know, it's tough, but, you know I -- it -- you know, it's certainly been a good last yearand-a-half or so. I think that you know, I'm -- I'm not just focused on stocks, so some of it is not measurable. I've put another -- I -- I believe that agriculture land -- productive agricultural land with water on site is -- will be very valuable in the future. And I've put a good amount of money into that. So I've -- I -- I'm investing in alternative investments as well as stocks. ERLICHMAN: But buying -- just buying the land, not some stock type (INAUDIBLE)...
BURRY: Well, I'm a value guy, so I don't -- I want to buy the land. I want the raw land and then I'll -that's the way to get it cheapest. ERLICHMAN: How much of your portfolio is in land, would you say? BURRY: Oh, I -- I don't want to disclose that, but it's a significant amount at this point. ERLICHMAN: What about stocks? You say you're buying small cap stocks, is that what you're saying? BURRY: Yes, you know, I -- I think -- well, not all the time. Again, I -- I just follow my nose and wherever it leads. The -- I've -- I'm investing in -- in -- in some very big companies and some very small companies, some here, some in Asia. It -- it's hard to -- it's hard to nail it down as -- as a certain type of -and this has been a problem ever since -- when I was investing in the hedge fund, even if you broke it out, large cap, small cap, it didn't tell you what the thesis was. If you had broken it down by industry, it often didn't tell you what the thesis was. The -- the -- the thesis, I -- I'm looking for an original thesis. I want a thesis that I haven't heard about or seen or in -- and I don't take others -- others -- the theses of others very well. So I'm looking for an original thesis and it leads me to disparate areas. ERLICHMAN: Well, you know the thesis on Wall Street these days for anyone who thinks the market is going up. They say stocks are cheap. BURRY: Um-hmm. ERLICHMAN: What do you think about that? BURRY: Wall Street always thinks stocks are cheap. That's -- I'd hate to live in New York and hear that 10 times a day. ERLICHMAN: Before I ask you a couple more questions on that, I want to go back to land. Can you give a little more color on the type -- type of land you're buying? BURRY: Well, you know, part of it is that we don't want to drive up the price of this land, so I think that I'll refrain on -- on that question. I'm sorry. ERLICHMAN: OK. All right, what a -- what about sectors? For example, what about bank stocks? Do -- can you find bank stocks that you like? BURRY: Banks are very difficult to -- to analyze. And -- and they've not been generally something that I've spent a lot of time on. I'll tell you the in -- the areas that -- I'm very interested in smaller tech companies. I think -- what I'm interested in are companies with a secular growth profile or a secular history that I think will play out that is generally not dependent on what the government does, which is kind of hard to find.
You know, do -- I'm looking for good products, good management, good market position, competitive dynamics. So I'm -- so I think digging around in smaller, secular growth stories, I think it -- they've been neglected. I think it's especially true in Asia. Smaller companies in Asia, I think, are neglected. There are some very cheap companies there. Yes, so. ERLICHMAN: Well, speaking of government influenced sectors, what about the for-profit education companies? They've got a -- a lot of attention, where you see Steve Iseman, who's also profiled in "The Big Short," gets a harsh critic, in his words, that Morleykin (ph) (INAUDIBLE) a prime mortgage market. Do you feel the same way about for-profit -- for-profit education companies? BURRY: Right. You know, I don't have a good opinion on the for-profit education companies. I've -- I'm not -- I've never liked them, never liked them, probably for similar reasons. And there's always been some shenanigans in the financials, too. And so I've never liked them. But, ironically, I'm in this book, "The Big Short," but I'm not a big short. I don't go out looking for good shorts. I'm spending my time looking for good longs. That's what I did before. I shorted mortgages because I had to. The -- every ounce -- every bit of logic I had led me to this trade and I had to do it. And I had to pull back on equities because I saw what was coming I thought would affect everything. Fundamentally, I'm looking for long-term investments in equities and -- and bonds. And fundamentally, that's what I'm doing -- long investments, not short investments. ERLICHMAN: OK. Would you go long some housing stocks today after they've been crushed? BURRY: I'd rather -- you know, I'm -- in my situation, I'd rather go long housing itself or real estate itself. You can -- depending on how you structure it, you can -- in the real market you can -- in the physical market, you can get some pretty good deals. And I've done some of that, too. ERLICHMAN: So we can take away that while you're bearish generally on the housing market, that the guy who made this big bearish bet on housing a few years ago is now seeing value in some real estate out there. Is that what you're saying? BURRY: I think there is some value in -- in real estate. Yes. I mean you have to buy it right and it's -there's certainly -- it's not in general. That's the problem. I think that there's an awful lot of people out there looking to buy these distressed properties now. And -- and so you need to -- you need to find special solutions. It's -- it's how I've invested from the very beginning. I'm always -- I'm look -- I'm looking for these special situations, these unique ideas. And -- and it's true in real estate, too. And I mean I -- I know one property we bid on, we were the second lowest bid of 30 bidders. It's -- and, you know, I think that market is a little overcrowded, but we were about to structure our bid so that we were favorable and -- and got the property. So, you know, in any event, I don't want to go into that too much, but... ERLICHMAN: I want to give you an opportunity right now -- I don't know if you want to -- do you use Kleenex for your eye at all?
BURRY: Oh, is it -- is it doing something? ERLICHMAN: It's -- it's -- I don't -- I just -- I don't know what... BURRY: Let me see. ERLICHMAN: I just wanted to give you the opportunity to... BURRY: Let me see... (OFF CAMERA REMARKS) ERLICHMAN: OK, let's talk about how some of the other players are investing these days. If you look inside John Paulson's book, though, you know, you'll find that he's the biggest shareholder in a home builder, in Viser Homes (ph). His firm is also a big shareholder in -- in mortgage insurer, PMI. And he's not the only one. There are a lot of hedge funds that own shares in PMI. What do you think of that strategy, of going along (INAUDIBLE)... BURRY: I had the thought, when I started to put on a short, that when this all plays out, well, I'll be running so much money and I'll be able to swoop in and -- and buy some of these things really cheap. And as it has played out, I just don't think that the recovery is going to be that robust. And so I'm not terribly interested. I -- I feel that some of the future crises that we're going to face and some of the future hurdles we have are fundamentally -- will -- will be an impediment to achieving some good gains in some of those investments. So I'm -- I'm largely staying away from -- from that thesis now. ERLICHMAN: (INAUDIBLE)... BURRY: You know, I -- go ahead. ERLICHMAN: No, no, go, please. BURRY: So, you know, Paulson's big on gold. And -- and that's something that is -- is -- is interesting to me and given how it might -- how I see the world playing out. But other than that, you know, I -- so I'm not, you know, I'm just saying that other than gold, I -- I haven't really bought into any of the other DCs (ph). ERLICHMAN: What do you do, do you buy -- do you like buying -- some people like to buy the physical gold bars? Some people buy... BURRY: It's a tough... ERLICHMAN: (INAUDIBLE)... BURRY: It's a tough one to play, yes. But, you know, I don't want to go too much into what I'm doing there. But I do -- I am bullish on gold. I think that the -- the way the central banks around the world are -are treating their -- the currencies -- I mean, you know, the -- the U.S. dollar is strong relative to Europe. But what's that saying?
I think that we're -- we need to be aware that central banks worldwide have followed the lead of our central bank and are debasing their currencies. ERLICHMAN: So that would suggest that you're bearish on the U.S. dollar. Are you a U.S. dollar bear? BURRY: Long time bearish. I think that I don't have a lot to say in terms of timing. One of the issues -- one of the features of the sub -- the subprime short, the real estate short, is I can put a very specific time on it because I was waiting for the worst possible mortgage, basically, the -- the pay option arm, the cash flow arm, which, in a world where people buy homes because -- on -- on the monthly payment that they need to make, when they don't need to make hardly any payment, that's about as -- as -the -- the -- the penultimate extension of credit to a homebuyer. And when I saw those worked through the -- the -- the prime credits and then a little bit into subprime credits, I said, OK, the timer has been set. And I thought 2007, it -- if not before, things are going to come down. You don't have -- I don't -- I can't find that -- that timer on any of these other theories -- Treasuries, China. I mean there's all these theories. I think we've become a nation of -- of -- of bubbleheads where we've just had this huge bubble burst and now everybody has got their ideas on what the next bubble is and what's going to blow up next. And that's not hard to do. It's not hard to say there's going to be a -- there's a bubble and this and that. The tough part is when -- when will it come blow -- come down? And with -- with mortgages, I could do that. With housing, I could do that. I think it's more difficult to time that out with some of these other things -- China and Treasuries, that sort of thing. ERLICHMAN: So it's not as if you're -- you've got some sure bet on the U.S. dollar right now that you're expecting to pay off in a couple of months or something like that? BURRY: No, none other than the gold investments. ERLICHMAN: You mentioned John Paulson. (INAUDIBLE) the question, since the two of you are often mentioned, have you ever had a conversation with John Paulson? BURRY: No. ERLICHMAN: Would you like to? BURRY: Sure. I -- I just don't know him. So, I mean, you know, he's just -- he's another hedge fund manager and I wouldn't be averse to it but... ERLICHMAN: Sometimes it feels like John Paulson gets more attention than you do. I don't know if it's because of the dollar amounts under management or because he's on Wall Street and you're out here in California. But have you ever thought about that? BURRY: About Paulson getting more attention? ERLICHMAN: Yes.
BURRY: No. That's not a -- that's not an issue. We're very -- it seems like we're very different. I think the way I go about investment is just very different. And I think Paulson and a lot of those others got the trade from Lippman, Greg Lippman. And, you know, I think a lot of people -- I think a lot of hedge funds get their trades from Wall Street and get their ideas from Wall Street. And -- and -- and I just like to find my own ideas. So I don't need to talk with fund managers to get their ideas. I want to find my own ideas. ERLICHMAN: What about credit default swaps, which obviously made you a lot of money? Do you still use them today for other types of investing? BURRY: No, I don't. I'm out of credit default swaps. ERLICHMAN: And who do you trade with? Anyone who's read "The Big Short" knows that you were trading a lot with Goldman Sachs. For trades like credit default swaps, but on an average day, if you want to pull the trigger on a trade, who do you deal with? Do you call up Goldman Sachs or various firms? Or how do you do it? BURRY: I have my favorite brokers that I've used for many years and I stick with them. I think you might be getting at whether any of these brokers I used are a little bit upset or -- or something and, you know, with "The Big Short." But -- but I haven't really heard anything like that. ERLICHMAN: I have to wonder if you get calls from people who would like you to actively manage their money again? Do you -- do people call you up and say... BURRY: Absolutely. Well, that's -- yes, it's funny. In -- in 2008, I don't think we had one call. And that was after we had that big year in 2007. And -- and now we're getting a lot of them. It's the power of the Michael Lewis book. It's -- it's good. It's a lot of publicity. But -- but I take it all -- it's -- I take it all with a grain of salt. When I -- when I was running -- when I got started and had some -- a good run for the first few years, I actually had to close the fund because my phone was ringing off the hook with people that wanted to give me money. And I didn't want to talk with them all of the time. And -- and a good number of them didn't turn out to be the investors that I wanted. So, you know, you hear of good returns and you go chasing a manager. I don't think that's the right way to go about it. ERLICHMAN: So the sense I'm getting is you wouldn't start managing money again just because you're getting publicity from the Michael Lewis book, is that what you're saying? BURRY: No. No, I'm not doing that. No. ERLICHMAN: And, you know, would you ever consider... BURRY: Sure. ERLICHMAN: (INAUDIBLE) again? BURRY: You know, I'll never say never. But -- but certainly not right now.
ERLICHMAN: Why? BURRY: Well, there are a few reasons. But, you know, involved -- there are a few reasons I'd rather not get into. But I'm having a -- a good time of it now. I think it's remarkable. Investing without investors is the most freeing thing. I can be one of the market completely, nobody cares. You know, I can get 100 percent invested on -- in March of -- you know, I can -- I can -- I can get 100 percent invested in -- on the turn of a dime and nobody squawks. It's -- it's great. ERLICHMAN: There's been some chatter, if you look on the Internet, that you should be going over to Berkshire Hathaway, work on -- work on Warren Buffet's team. Have you ever been contacted by Warren Buffet about working on (INAUDIBLE)? BURRY: Oh, no. No. And that's a ridiculous notion. I've -- there's only one Warren Buffet. Warren Buffet doesn't have a team on the investment side. I -- Buffet -- Warren Buffet is -- was an inspiration for me go to into money management. And I largely patterned my early career after what I'd read about him in "The Making of An American Capitalist" by Roger Lowenstein, which I thought was a phenomenal book. And reading that book, I immediately recognized, there's no point in even trying to be like Buffet. There's only one. ERLICHMAN: Have you had a conversation with Warren Buffet? BURRY: No. Never. I think -- yes, no. We haven't had a conversation. ERLICHMAN: But if he called and said, I know you're not managing money right now, but we'd love for you to come and work for us, would you consider it? BURRY: I'd tell him exactly why I -- there's no reason for me to be there. ERLICHMAN: So you're -- you're a young, wealthy guy. Outside of investing your own money, like how would -- what are you doing? BURRY: You know, spending time with my kids. I have, you know, a seven and a nine-year-old. And anybody with a seven and nine-year-old, boys, so it's fun. I'm doing -- dedicating myself to some other endeavors, too -- and I'd rather not discuss. But, you know, just the normal things that people do. And it's managing money in this office. I've got a small staff and -- and then spending time with family. ERLICHMAN: Here's the big question, on your iPod, are you still just listening to Metallica or are (INAUDIBLE)? BURRY: I added The Black Crowes. ERLICHMAN: Oh. BURRY: And Blink 182. ERLICHMAN: And how is the guitar playing going? BURRY: You know, I have no talent there. So it's fun, but it's like I got into wine a few years ago and I have no talent there, either. But it's fun. ERLICHMAN: We're going to take a very quick break.
(BREAK FOR DIRECTION) UNIDENTIFIED MALE: Time code 11:14:02, 3, 4. (BREAK FOR DIRECTION) ERLICHMAN: Mike, let's start when you were a kid. Your interest and fascination with stocks started very early, didn't it? BURRY: Very early, absolutely. Actually, and the style started pretty early, too, because the first stock I looked at I think I was in second grade. It was American Motors, and it made Jeeps that went with my little green men, my little Army men. So I knew I connected right away. Oh, you know, big "A," small "m," -- you know, force (ph) and change -- and that's a real -- they make Jeeps. And what's more, if that stock or the one above it goes from $1 to $2, or $2 or more dollars, you double your money. Very concrete, very simple, very attractive. Even at that age I think, you know, it sparked an interest. I know a friend of mine that's now working at Microsoft. He took a robotics course one summer in third grade, and we ended up creating a stock market game on this in Basic, I think, printing stock certificates and all that. So it was pretty early. ERLICHMAN: So you were familiar with things like stock symbols in the second grade? BURRY: Not really familiar. I mean, we're talking the most basic of knowledge. I think, you know, our stock game was a huge cheat, too, probably. It was just -- it's basically something is worth something and a certain price, and if you double it it's twice as much money. And it's a real company. ERLICHMAN: What are some other examples, early examples? I mean, those are some great ones. What about other memories you have with your interest in the markets or -BURRY: Well, you know, I think that I had some social challenges when I was younger, and I was very attracted to being a rock star, an athlete, or, as it turned out to be -- or something like a money manager. The reason being that they're performance-based. Sports, it doesn't matter how nice a guy you are. It doesn't matter how you groom your hair. If you perform, that's all you need to do. And so from a young age I was pretty interested in the whole idea of meritocracy and people being ranked as they should according to their effort and talents. And I thought, you know, running money was something where I could put the effort in and do it. So that kind of carried me through. I think I first started really investing in high school, then certainly all through college I was addicted to all that stuff. ERLICHMAN: Yes, you weren't only buying stocks, you were buying options. BURRY: Futures even, yes, when I was at UCLA. ERLICHMAN: I guess you were -- you said you were at bookstores at night reading all the business books. BURRY: Absolutely. Absolutely. My Friday nights would be spent at either one of two places, Office Depot or a bookstore. And the bookstore, you can sit around there a long time and people don't care. Office Depot, you stay around there a long time, they start to ask questions. But I was interested in business. I was interested in starting a business and I was interested in markets.
ERLICHMAN: You tie it into your social challenges as a child. It's well documented in books like "The Big Short" that you had cancer and lost one of your eyes as a child. Can you explain a little bit more about how that or any social challenge related to that affected this desire to excel in sports, excel in all sorts of areas? BURRY: Well, I think that as you come up in sports with one eye, as a kid you try everything. I played soccer, baseball. I played football, basketball. I played everything. But you do run into some limits. Not all the ones you -- actually, I did OK in a lot of things. But when they started throwing curveballs in baseball and things, I couldn't hit. I got one hit all season. So there was that kind of stuff. There was -- you know, I was aware of it because you're never not aware that you have an artificial eye. You can feel it. I mean, you forget about it sometimes but, by and large, every day you're aware you have an artificial eye. And as a kid, and as you're growing up and you're dealing with that, you just -- yes, you're growing up with it, so you're used to it, but at the same time you know you have it. You notice when you're looking at somebody and they keep moving to the side because your eyes are not lining up. You notice it when kids tease you because you're cross-eyed or that sort of thing. So, you know, or kids asked me to take it out every single year through high school. So you're aware of it. And other people make sure that -- and so you are -- you would be interested -- I was interested in competing in a different space, and that's where the whole athlete, rock star, money manager thing came up. And so the other thing was writing, being an author. So that was another twin interest I had way back then. ERLICHMAN: I think what fascinates a lot of people about your story is that you didn't know then what you know now, which is you do have Asperger's syndrome -BURRY: Right. ERLICHMAN: -- which some people will say in certain cases will contribute to someone's ability to be able to really focus in one area. BURRY: Right. ERLICHMAN: And I have to ask you about thinking back now and your early fascination with the markets, whether or not you think, oh, yes, that played a role too? BURRY: Oh, absolutely it did. I don't know, why would a second or third-grader get so fascinated with the markets? He's washing money and pressing it in books and creating stock computer games and that sort of thing. I mean, not why else, but that was one of the things. I've had these interests that have been very intense in my life. The two interests that are really intense being music and the markets. And every once in a while there's something else that will catch my fancy for a little bit, but it always comes back to those two things. And the thing about the eye was I realized as an adult that that was -- I was a little bit protected in that I had an excuse for why I didn't fit in, whereas most people with Asperger's don't know why they don't fit in. And I can say I didn't know I had Asperger's, but I knew I had a fake eye. And so I was a little bit protected there.
ERLICHMAN: So let's talk about your schooling. You decide to go to medical school even though you have this great fascination with the markets and business. Why did you decide to become a doctor? BURRY: Nobody in my family had been a doctor. I had gone through all the pain of the premed curriculum. Even though I did economics at UCLA, I had done premed. And I actually applied to both business school and med school. And I got into both, and med school is a whole heck of a lot harder to get into. And so that was a good part of it. The other part of it was that I thought even in -- maybe it's just being in college, but even in high school I thought that just -- I came to this realization that just dealing with numbers and money is not a humane way to live your life. It's not a helpful way to live your life. And so I really did have this interest in going into medicine to help people. I mean, in the starkest terms. ERLICHMAN: But when you became a doctor, you did realize there were some things about the profession that you didn't like as much. Is that fair to say? BURRY: Well, absolutely. My hands are useless. And so I couldn't do -- you know, there's a lot of things you can't do or can't do well. And so I just don't have a good perception probably because of my eye and space, and small spaces, so sutures and little things. So, you know, that was part of it. I think that I became very aware of the business of medicine very early in medical school. I actually applied and was accepted to do an MBA at Vanderbilt while I was there for medical school. And -- but I couldn't afford it in the end. The business of medicine -- this was Clintoncare. Remember 1993, 1994? It was a big --I would stay up until 3:00 in the morning debating health care policy with -- there's a medical ethics Ph.D., a guy. I think he went into Psych. Anyway, we just sat in the student lounge debating this stuff until all hours. And my interests really went towards policy. And even my first summer in med school was spent doing health care economics research up at the Rehabilitation Institute of Chicago. The American Hospital Association is up there in Chicago, and I was able to access their files. And I wrote a paper there outlining legislative changes and how they've affected the development of health care in the rehabs and (INAUDIBLE) space. And so that was -- my interest in the markets just was overwhelming my interest in medicine. ERLICHMAN: So here you are now, the doctor, the doctor who starts blogging sometimes during your shifts about some of your investment ideas. BURRY: Now, I'll point out that when you're blogging -- I was blogging at night. This is on call, you don't have anything else to do. There's nothing possibly else you can do other than sleep, so I wasn't neglecting patients to do this. But yes, I started -- this was after my dad died. And this was -- I started really in the middle of medical school, starting in the clinical years. I had already been investing. I started to explore it a little bit online.
ERLICHMAN: I guess the question is why would you want to share your investment ideas? I mean, investing is one thing, putting it out there is another. BURRY: It was actually an interest -- one of the interests that captured my fancy for a while was taking apart computers and putting them back together and trying to make them faster. And this was really exciting in the late '80s and early '90s, when it was actually cheaper to put together your own computer and you can run around all these little stores that had the motherboard that you wanted or something. And so I would put together computers and try to make them faster. So I was very interested in computers. And so I had this twin -- this interest that -- maybe just from growing up around here. But the Web was very exciting to me, because I had been on some bulletin boards before that, the Wildcat (ph) bulletin boards, and so the Web was very exciting to me and I wanted to put something up there. And a few other students were putting up medicine pages. And I said, well, I can put up something like that, but I know nothing there. I thought I knew something in investing, and so I put that up and it kind of took off. ERLICHMAN: How did that feel? How did it feel? All of a sudden, you're getting this feedback. You've got investment fans. That was probably something you never experienced, to get that -- I mean, nobody gets that until you put yourself out there. BURRY: You know, it really fit with my idea of meritocracy. The Web is this wild thing that, if you put some good content up there, possibly somebody comes. I wasn't advertising anywhere. Possibly, somebody comes and reads it. And I didn't think it would necessarily lead to anything, I just thought somebody will actually read it. Wow, somebody actually read what I wrote. Well, somebody that read it was this guy that was hired at MSN, Jon Markman. "I'm Jon Markman and I'm running MSN Money" to compete with AOL at the time. This was, like, '96, '97. And so I started writing for them. And then I started getting paid a dollar a word to write, which was -- I didn't have a lot of money, and I was actually in a lot of debt. So that was tremendous validation for what I was doing in that space. ERLICHMAN: And what was it like to be a value investor, which you are, at a time when there was this tech mania going on, the dot-com boom? BURRY: Well, the dot-com boom, I was here. I was here from '98, '99, 2000, up at Stanford. And it was all around me, tech stocks. I would walk to clinics, and I'd walk with a resident who just made a million dollars on Polycom or something like that. It had gone up. And so it was surreal. Actually, because Stanford is located right on Sand Hill Road, which is the main strip for dot-com mania. So it was an interesting perspective. My natural state is an outsider though, and no matter what group I'm in or where I am, I've always felt like I'm outside the group and I've always been analyzing the group. And everything about -- a lot of these companies, I knew you can drive by them, you can visit them -- were not worth what they should be worth or what they were being marked at. So I was just following my value investing vision, or special situation/value investing vision. And all this other stuff just seemed like, well, it was going to end badly. I knew it was going to -- this is where I say it's easy to spot a bubble. I mean, that was easy to spot.
I mean, I think a lot of people did, too. If you talked to people back then, just like with the housing bubble of 2003-2004, there were people talking about it being a bubble but nobody knows when and maybe it goes on forever. That was – it was interesting because nobody did know really when it would end, why it would end. So it was certainly an interesting time to be doing that. That was – I think I received some reputation specifically for that, though, value investing during the dot-com and doing well with it. ERLICHMAN: You mentioned the passing of your father. You’re this medical student. You have a lot of student loans. Clearly you’ve got a talent for investing but becoming a professional investor, if you don’t have the money to do it, I would think is challenging. To a certain extent that changed, did it not, after his passing and you did end up with some? BURRY: Well, not a lot. I mean, I think that – excuse me – I mean, it didn’t pay off my loans or anything like that. But it did give me some money to invest, a decent amount, $50,000 to invest. What I would do is I was using that to help finance my lifestyle because I’d grow that and then just spend it. When I got married that’s what – we were getting our money off just that. Well anyway, so it was a significant amount of money at the time and I don’t think it had – honestly I think it was at $45,000 is what I had and I said, this is the last little bit that I got – this is the nut of what I got from my dad and I don’t want to just pay down my medical school debt with it. It’s like now I want to do something. So I put it into starting the partnership. ERLICHMAN: Let’s talk about the hedge fund. You decided to call it Scion Capital. Why’d you pick the name? BURRY: I was big into fantasy books as a kid and David – let’s see I’ll get this right – Terry Brooks, Scions of Shannara, Elfstones of Shannara, that sort of thing. There’s a whole series, Shannara series, and Scions of Shannara when I was thinking of a name was right there. I was living in my home I grew up in for free when I did it. So the bookshelf was still there and I just looked at the book and picked it. ERLICHMAN: So it really didn’t take a lot of time – this is what’s so fascinating – for you, the doctor, to say, okay, I’m going to start up a hedge fund, to get contacted from some pretty well-known investors. Who was contacting you? BURRY: Well, geez, just a lot of individual investors but also people who were analysts at other – at mutual fund companies or one guy was a PM. Generally it was lower level people but definitely institutional contacts. But then there’s the brokers. There’s brokers from Morgan Stanley and that sort of thing, that would call and they’d have some business ideas; then came some of the pretty well-known hedge fund guys. I knew I was getting attention when I said something I think in 1999, late 1999. I said that Vanguard funds are the worst funds to invest in now. Those index products are going to do horribly over the next decade and I linked to the site and I got a cease and desist from Vanguard. So I realized, oh, people are reading this and I got a little tool to see who’s reading my site and that’s when I saw that it was all these institutions. It was all coming from financial institutions. ERLICHMAN: There’s a great part in The Big Short where Joel Greenblatt, the value investor and author, says, hey, I want to invest with you. I want to fly you to New York first class. Come on. Come to the East Coast and let’s meet. What was your reaction? Were you nervous? What were you thinking at that time? BURRY: Well, he called me. I’d already decided – I’d already left medicine. The year in medicine goes to June, the end of June. So he called in mid-July and I’d already left and I’d actually interviewed him in ’97 I think it was for a spinoff story I was doing for MSN and I just dropped it. I did the story and then I didn’t talk to him again. I don’t remember him thinking – anyway, he helped me with the story and then we dropped it.
So I didn’t hear from him and then he called me at home in July of that year that I left medicine and said, yeah, you want to come to New York? We want to talk. I had already had the confidence to leave medicine and to start this and I thought I was going to get some money. I think Joel calling up though, and since I knew who he was, that was really significant. ERLICHMAN: And then you get to New York and you learn that not only does he want to invest with you but – and I’m taking this from the book so you correct me if I’m wrong – but I’d also like to buy a quarter of your business, of your fund, and pay you a million dollars for it, right? That’s essentially – BURRY: That’s roughly it and it was hugely exciting. I mean, actually I went out with my wife and yeah, it was hugely exciting. Actually I didn’t know – I mean, actually I had been to New York once before but not for business and I just didn’t know how to dress. I didn’t know anything about it. But I came back and told my wife and it was exciting certainly. ERLICHMAN: Would you say it was life changing? Was that one of those moments in your life? BURRY: It was life changing. The business was going to be the business regardless but it was life changing because it really opened some doors early on. I was having trouble getting a prime broker. I’d go to Bear or whoever and they would not necessarily pay much attention. So once he was involved, I got my prime broker very quick and the account really quick and that sort of thing. ERLICHMAN: Let’s talk about performance in the early years; again, correct me if I’m wrong. In 2001, the fund’s first full year, you’re up 55 percent. The next year, market’s down more than 20 percent. You’re up 16 percent. In those early years, were you thinking about the investors and worrying about them or was it just fun? You had this money to play with and you could put the investments – you could put the money to work and you were hitting home runs. BURRY: Well, there’s a story that stuck with me regarding Warren Buffet, that an investor showed up when he was running his partnership back in the early ’60s and pounded the door wanting to know what was going on and he kicked him out of the fund and said, I’m not dealing with you, and kicked him out of the fund. That’s how I ran the fund. I didn’t offer transparency. I provided one quarterly report in a letter form and that was all you got. I basically demanded that if you’re going to invest in my fund, you need to accept my terms from the beginning, the terms not being super high fees but I’m not going to cater to you. So those first few years I felt I was getting money in and I was doing OK and I didn’t have to deal with investors too much. I didn’t think about them too much in my investing process and it didn’t influence my investing process that I had investors. ERLICHMAN: Were they the types of investors who simply respected that or did they say – were they sending you gift baskets saying, thanks, Mike? BURRY: No, no and I didn’t expect that at all. In fact, no, I think there was nothing involved like that. It was just there was good relationships with investors who rarely called. ERLICHMAN: Let’s get to the big trade of your career. It’s as early as ’03 that you’re starting to think, raise a lot of questions and do research on the housing situation and by 2005 you are ready to make this bearish bet on subprime mortgage bonds. Of course this is still a time – we were talking about this earlier – when there weren’t a lot of people who were out there thinking this way. Arguably nobody was. What was your research telling you? BURRY: Well, again, there’s – you have to weave in that big picture with the rate cuts into ’03, with mortgage rates at 40-year lows by ’03 and then what I had termed extension of credit by instrument took hold. You had ARMs which – adjustable rate mortgages were created or basically allowed back in 1982 with the Depository Institutions Act of ’82 I think it was. But they really took hold starting in the late ’90s
and then actually really more the early 2000s ARMs really exploded. I viewed the ARM a little suspiciously. I thought it was a little bit of a teaser rate mortgage I thought. But it didn’t concern me too much. When rates collapsed, of course the ARMs exploded and in 2003 something curious had happened. The interestonly mortgage was reintroduced and that spurred me to write a section in my letter called Basis for Concern. The interest-only mortgage to me was you’re getting closer to that point of maximal provision of credit to the mortgage, to the asset, to the homebuyer. I really thought that incomes had already stopped – had diverged from the housing prices. Now, we’re floating entirely on the type of credit being offered. By 2003, rates aren’t going any lower. So you need to change the instrument that you’re offering to the borrower to get home prices up and to keep volumes up. So when the interest-only mortgages were introduced I noted it and I mentioned it to investors. Then I watched it. So I watched it in these mortgage pools and I knew about mortgage pools because of research I had done into PMI and the mortgage guarantors because they had stretched their business and started guaranteeing mortgage pools in so called bulk transactions and negotiated transactions. So what I was looking for was the penultimate mortgage, the mortgage that would mark that the top is coming. So instead what I noticed was just that the interest-only mortgages were growing as a percentage of these subprime mortgage pools that were being sold or that were being put together by Wall Street. I watched that grow and then in 2005 the option ARM, I mean, the pay option ARM arose, also called cash flow ARM. These in many cases offered the minimum payment that could be less than the interest payment would be and the difference would negatively amortize into the balance, the principal balance. So that was 2005 and actually those were only in Alt-A mortgage pools but within those pools you can see that some of them were being paid to subprime borrowers as early as ’05. So I thought that’s pretty much it. When these interest-only mortgages and then the pay option ARMs flooded the channels and you could see it in the balance sheets of Countrywide and Washington Mutual as well because they were holding a lot of this. When you saw that hit kind of the maximal distribution through the system, I said home prices can’t go up anymore. They just can’t. Income wasn’t doing enough to support it and that’s it. You’ve blown the wad. This is it. You’ve hit the penultimate mortgage and home prices cannot go sideways. They will necessarily fall, the reason being that home price appreciation was built into the interest-only mortgages and the pay option ARMs. It was part of the trade that the borrower did to get this house that they counted on refinancing it into the home price appreciation. They counted on it. They never expected that they would actually get to the end of that teaser rate period and have to pay that higher amount per month. So home price appreciation was built into the whole transaction for a couple years then. Once home prices were no longer going up, this stuff would be pulled from the market. It wouldn’t be part of it anymore and it wasn’t and home prices would necessarily start to fall. The credit would start to be pulled away and just on the margin as the credit was pulled way, home prices would start to fall. So that’s what I saw in 2005 and that’s why I just essentially made it the big largest investment of my life. ERLICHMAN: In theory, it all makes sense to people now. But this is heavy stuff even for people who are seen as smart investors. Do you think that you have an ability that is superior than most people out there? I mean, you did some very intense research on this. BURRY: I did a lot of work on it. But I was surprised. I put so much on in the summer of ’05 and the fall and the winter of ’05 and ’06, early ’06. I tried to raise a fund, Milton’s Opus, - Milton’s opus being Paradise Lost. I tried to raise a fund called Milton’s Opus to just do this because I wanted to do it in big size but I couldn’t get it going.
The urgency came from my belief that I can’t be the only one thinking this. There’s no way. This is way too important a market, way too critical a market to our economy and those were the years when jobs were increasing 200,000, 300,000 a month, the number of jobs and over half of them were mortgage or housing related jobs. People were cashing out hundreds of billions a year to finance their lifestyles. This was too important. Why isn’t anybody else seeing this? Somebody will see it and when they do, spreads will blow out wide and I’ll lose my cheap protection, right, because I’m buying cheap protections. I want to get it on when it’s cheap before it blows wide because it might blow wide well before things crash ERLICHMAN: Let’s talk about that prediction because buying credit default swaps is something back then even nobody was doing. UNIDENTIFIED FEMALE: John, I’m going to stop you for a second. ERLICHMAN: Sure. UNIDENTIFIED FEMALE: We have so little tape left. I’m just letting you know we only have one minute left on this camera. ERLICHMAN: OK. UNIDENTIFIED FEMALE: How are you doing? UNIDENTIFIED MALE: We actually – he put another card in so we have 19 minutes on these two. UNIDENTIFIED FEMALE: You do? UNIDENTIFIED MALE: Yeah. UNIDENTIFIED FEMALE: Sorry. I thought we were out-out. UNIDENTIFIED MALE: No, that’s great. UNIDENTIFIED FEMALE: I know you guys are making progress. I think there are some, at least on my list that are – UNIDENTIFIED MALE: Are we still rolling? UNIDENTIFIED FEMALE: I think you’re doing good. ERLICHMAN: Yeah, I’d say we have about – UNIDENTIFIED FEMALE: Like three or four? ERLICHMAN: Yeah, 15 more minutes. We have tape time for 15 more minutes? UNIDENTIFIED MALE: I have nine minutes on this one. UNIDENTIFIED MALE: Nine. ERLICHMAN: Of course, we’re not even asking Mike if he minds talking for an hour or so. BURRY: I don’t mind. Yeah, no that’s fine. UNIDENTIFIED MALE: Your two main cards are 18 minutes, the two main cards.
UNIDENTIFIED MALE: And I’ve got nine minutes. UNIDENTIFIED MALE: Cameras are still rolling, right? UNIDENTIFIED FEMALE: Then I want us – UNIDENTIFIED MALE: Still rolling, we haven’t cut. UNIDENTIFIED FEMALE: You have nine minutes? ERLICHMAN: You guys are good? UNIDENTIFIED MALE: Yeah. ERLICHMAN: Great. Well, what I was going to say Mike was you were doing something at the time nobody was doing which is to call up Wall Street firms and say, hey, I want to buy credit default swaps, buy some protection on subprime mortgage bonds. Even now it’s still tricky for a lot of people to say. When you called around to the Wall Street firms, what was the reaction you were getting from firms like Goldman Sachs, et cetera? BURRY: Well, what I was looking for was a standardized swap, a standardized swap. What Wall Street was doing a little bit in ’04 and ’05 were custom spoke swaps for, let’s see, there were people with mortgage portfolios and other portfolios looking to hedge a little bit. So there were over-the-counter, kind of one-off kind of deals being done before that. Now, what happened in – certainly credit default swaps existed before that. The corporate market was huge. Corporate CDFs were a big, big market and I was very well aware of that. So in March of ’05 when I was calling around, there was just not – nobody was doing standardized swaps. I did receive some color though in terms of what people were doing and who was buying these. Nobody was buying these over-the-counter one-off deals to bet against the market. They were just already in the market. They were looking to hedge themselves a little bit generally. But I did get some responses that confirmed that standardized swaps were coming at some point. I basically wanted to be on top of that when it was happening. ERLICHMAN: On the simplest of levels, you’re buying some protection from a firm like Goldman Sachs and then Goldman Sachs is finding somebody who’s on the other side of that trade, generally with these types of transaction it was firms like AIG. Is that –? BURRY: In the early days where Goldman told me outright they were warehousing the risk. They would try to put together Abacus deals and they would warehouse the risk. I brought it up as a concern with Goldman. You’re warehousing the risk for the next two months. How do I know you’re not just going to control the market for the next two months? So it was a subject of some contention actually in the summer of ’05. Early on, the synthetic CDO deals like the Abacus deals, they hadn’t existed before. They needed to get started. To get started, these banks would sell protection where they could and then warehouse the risk and then sell it off. I have no idea about AIG. I was not involved with any discussions regarding AIG or what they’re doing, although I did bet against AIG as a short precisely because I knew they were AAA rated and when they lost that rating they would have to post a tremendous amount of collateral. ERLICHMAN: You outlined a trade that was clearly not going to occur overnight. BURRY: Right.
ERLICHMAN: It was going to take a couple years to play out. So when you went – you didn’t have to provide too much information, I would imagine, to your investors but this was something very different than a good old values doc investment where you could see potentially return in whatever, six, nine months. So how did you position it to your investors? BURRY: My positioning with my investors had always been from the beginning give – I need three to five years. If you’re going to be here one or two years, there’s no point. I’m going to invest in things that are turnarounds, that are ugly, that may not turn around for quite a while and it’s not six to nine months. I never marketed six to nine months. It was always years. The credit default swap, especially on the mortgage portfolio, I saw a clock. I saw the time clock. I knew when it was going to happen. We just needed to make it to that period – make it through to that period. That was something that was a hard sell when it moved against us initially. ERLICHMAN: When did you know? When was the moment where what was happening in the market was starting to play out as you had anticipated and you said, yeah, they’re going to thank me soon, my investors? BURRY: I always thought that when it all – I was actually 100 percent confident. I thought it was a sure thing. I thought that – I never thought that because basically those mortgages started going bad by late ’05 and ’06. They started going bad early. It was just a matter of time for the technicals to catch up with the fundamentals, which is often the case with value investing. So it was all – it all fit into my mental model for how investing should work and even when there was the investor rebellion and even when we had these difficulties in ’06, I was 100 percent confident when it was going to happen and I would tell people just wait. We’re on the cusp, 2007 it will happen and it did start to happen. It started to play out in our marks really not until the summer but a little bit in early ’07. ERLICHMAN: You were 100 percent confident. UNIDENTIFIED FEMALE: John? ERLICHMAN: Oh yeah. UNIDENTIFIED FEMALE: You have two more questions. That’s it. Otherwise we have no more tape for B-roll at all. ERLICHMAN: OK, all right. Well, I should ask then – this is a show called Risk Takers and you clearly didn’t see yourself as taking risk. This was a no-brainer trade but others would have seen this maybe as risky trade, no? BURRY: I think there was a tremendous amount of confusion surrounding this. I was buying essentially put options on the market. I couldn’t lose more than the little bit that I – or buying insurance. It was like I paid the premium but I was not responsible for the notional. I think there was a lot of confusion when we got up to I think $8.4 billion notional short. That notional amount was what we could make. It had nothing to do with how much it would ultimately cost us. In fact, the $2 billion in mortgage shorts were only marketed on our books at about $83 million and that’s about what would cost us if everything went to zero. So it wasn’t – I didn’t see it as a hugely risky trade. I saw it as an incredibly asymmetric – a very good opportunity. ERLICHMAN: But how did you feel when there were investors that got their money back, made money on this trade and then said, we’re not interested anymore? BURRY: The hedge fund industry increasingly even since I started has – (audio break) – if you’re volatile, you’re risky period and I have never thought that volatility is equivalent to risk or that risk is derived from
volatility. That’s never been part of my mindscape. I think Wall Street loves using volatility as a measure of risk. There’s tremendous social proof in it. There’s all the Nobel prizes, but I think it’s flat wrong. ERLICHMAN: At the end of the day, how has this trade, this big short, affected your life? Is there one thing more than anything else? BURRY: I think that the largest angle, which is not a good one, is that I’ve really lost faith in our leaders to do the right thing. I think that loss of faith, that loss of – I mean, I find it sad what happened in the economy and how we’re not working to fix the problems. It really does affect me quite a bit. ERLICHMAN: You alluded to this earlier but I have to ask before we go, do you think there’s a bond bubble out there, all this money being issued by Treasury and people gobbling it up. Do you think there’s a bond bubble right now? BURRY: I don’t know. There’s not much more of a bond bubble than there was in Japan 10, 15 years ago. It can go on a while I think. We’re very important to the world. We’re the number one consuming economy by far. Even when China overtakes us in terms of overall GDP size, we’re still going to be the number one consuming economy. We’re very important to the world and I think that needs to be kept in mind. ERLICHMAN: All right, thanks Mike. They’re going to kill me for asking the question. UNIDENTIFIED MALE: Can we get a room tone? UNIDENTIFIED MALE: Everyone quiet for one second. UNIDENTIFIED FEMALE: Gently. UNIDENTIFIED MALE: Let’s get room tone really quick. UNIDENTIFIED FEMALE: Yeah so let’s just hold for one minute. We’ll just be quiet for room tone. UNIDENTIFIED MALE: OK, quiet please, begin room tone. End room tone. UNIDENTIFIED MALE: So we’re just going to pull back and get a couple wide shots. UNIDENTIFIED FEMALE: No, well – UNIDENTIFIED MALE: We can always dub him and restart, the micro-card started earlier. UNIDENTIFIED FEMALE: I can’t – well, I can’t really – UNIDENTIFIED MALE: End transcription. END
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