Michael Burry’s bet against the housing bubble began with WorldCom bonds. Had he never learned from his WorldCom bet, it’s unlikely his housing bubble bet pays off so big.
Here’s the thing, Burry made money on WorldCom bonds. But he missed out on a lot more. So he asked why?
I was onto WorldCom pretty early and they went from investment grade to bankrupt overnight. And so, I ended up doing okay with their bonds on the way back up. But, I wondered why didn’t I make more money on this? And so, I wasn’t a short. I don’t like to short equities… So I basically noted though, it went investment grade to bankrupt overnight. And it hit me. That’s the way to short companies that you think look so gilded now, but you think might tumble, as a result of asymmetric risk taking — so, especially leveraged companies. And I noted that there were a lot of these highly-rated, super leveraged companies where you could buy credit — because you can’t buy credit default swaps on junk or stuff that’s below investment grade. So, that was how I came to investigate CDS’s. So I bought books.
The right question drove Burry to learn about credit default swaps. Then he sat on the information.
As he explained in his FCIC interview, a look into home builders was the next thread that eventually led to his big short: Continue Reading…