The Big Short Chapter 2: Michael Burry in the Land of the Blind
The chapter title is “In the Land of the Blind.” There is a proverb: “In the land of the blind, the one-eyed man is king.” Michael Burry literally had one eye. He lost his left eye to cancer when he was two years old. Lewis is not being subtle here, and I love him for it.
This is the chapter where we meet the most unusual character in the book. Not the loudest, not the angriest. The loneliest. A man who sat alone in a room with the door closed and the shades drawn, reading documents nobody else would touch, and saw the entire financial system heading off a cliff.
The One-Eyed Doctor Who Didn’t Want to Be a Doctor
Michael Burry became a doctor not because he loved medicine but because medical school wasn’t hard for him. The actual practice was a different story. One scene from gross anatomy turned his stomach permanently: “One scene with people carrying legs over their shoulders to the sink to wash out the feces just turned my stomach, and I was done.” His feelings about patients were equally honest: “I wanted to help people - but not really.”
What he actually wanted was the stock market. His father had shown him stock tables as a kid and told him the market was crooked. Naturally, it fascinated him ever since.
The Glass Eye and Everything It Explained
Burry’s glass eye oozed and wept and needed constant attention. Kids called him cross-eyed. They begged him to pop it out, and when he did, it got infected and disgusted everyone.
Face-to-face conversation was torture. His glass eye wouldn’t line up right, so the person he was talking to would slowly drift left. His compliments came out wrong. “For your size, you look good. That’s a really nice dress: It looks homemade.” By his late twenties, he’d gone through high school, UCLA, and Vanderbilt Medical School without forming a single lasting friendship. His two closest friends he’d known for twenty years combined but met in person only eight times.
I have worked with people like this in IT. People who cannot do small talk but who can focus on a problem for sixteen hours straight and see things nobody else sees. Companies either fire these people or get very lucky and let them do what they are good at.
His Match.com profile was brutally honest: “a medical student with only one eye, an awkward social manner, and $145,000 in student loans.” Years later, when his son was diagnosed with Asperger’s syndrome, Burry researched it and recognized himself in every description. The glass eye hadn’t caused his social difficulties. It was Asperger’s all along.
The Accidental Fund Manager
While doing fourteen-hour hospital shifts at Stanford, Burry stayed up between midnight and 3 AM writing about stocks on the internet. First on a message board, then on what we’d now call a blog. He posted his trades and reasoning during the dot-com bubble, buying unfashionable value stocks when everyone else was chasing internet garbage. And he was making money. A fund manager in Philadelphia watched in disbelief: “He’s up fifty percent. It’s uncanny.”
Burry could track visitors by domain. At first it was random AOL users. Then Fidelity, Morgan Stanley, and other big firms started showing up. When he criticized Vanguard’s index funds, Vanguard’s lawyers sent him a cease and desist. He was a neurology resident running a blog at 2 AM, and Vanguard was scared of him.
When he quit medicine to start Scion Capital, his starting capital was $40,000 against $145,000 in student loans. Then Joel Greenblatt from Gotham Capital, a legendary value investor, called and said: “I’ve been waiting for you to leave medicine.” Gotham flew him to New York, first class, and offered a million dollars for a quarter of his fund. Burry had never flown first class. He didn’t own a tie. He panicked and ducked into a Tie Rack on the way to the meeting, only to find the Gotham partners in t-shirts and sweatpants.
In his first full year, 2001, the S&P 500 fell 11.88 percent. Scion was up 55 percent. Next year, S&P down 22.1 percent. Scion up 16 percent. By end of 2004, he was managing $600 million. All without borrowing money, without shorting stocks. Just one guy in a room reading financial statements on a $100-per-year subscription.
Into the Bond Market: How Burry Found the Bomb
In early 2004, Burry started reading about subprime mortgage bonds. Let me explain what these are.
Banks make home loans. Then they bundle thousands of loans together and slice them into layers called tranches. Think of a building. Top floors are safest, get paid first, get the best credit ratings. Bottom floors get paid last, lose money first, but earn higher interest rates to compensate.
Burry started reading the 130-page prospectuses for these bonds. He read dozens. He was certain he was the only person besides the lawyers who drafted them to actually do this. What he found was terrifying. By 2005, he saw something called the interest-only negative-amortizing adjustable-rate subprime mortgage. Translation: a mortgage where you didn’t have to pay anything at all. Your debt just kept growing. What kind of person wants this? Someone with no income. What kind of lender offers it? One who has lost their mind.
“What you want to watch are the lenders, not the borrowers,” Burry said. “The borrowers will always be willing to take a great deal for themselves. It’s up to the lenders to show restraint, and when they lose it, watch out.”
Inventing the Bet: Credit Default Swaps
Burry wanted to bet against these bonds. But you couldn’t short them the normal way.
So he thought about credit default swaps. In plain English: an insurance policy. You pay $200,000 a year to insure $100 million in bonds. If those bonds go bad, you collect up to $100 million. If they don’t, you lose at most $2 million over ten years. Your risk is defined. Your upside is enormous. Like putting chips on a roulette number.
Credit default swaps existed for corporate bonds but not for mortgage bonds. Burry’s idea: make them exist.
On March 19, 2005, alone in his office reading an obscure textbook on credit derivatives, he got the idea. He called seven major Wall Street banks. Five had no idea what he was talking about. Only Goldman Sachs and Deutsche Bank were interested.
Within three years, this market would grow to a trillion dollars and cause hundreds of billions in losses. But when Burry first called, nobody knew what he was asking about.
Buying Insurance on a Disaster
On May 19, 2005, Burry made his first trades: $60 million in credit default swaps from Deutsche Bank on six specific bonds. He had analyzed loan-to-value ratios, borrower documentation, property locations, and dozens of other factors to find the worst mortgage pools in America. Then he bought insurance on exactly those pools.
What shocked him: Wall Street didn’t care which bonds he picked. Goldman Sachs emailed him a long list of terrible mortgage bonds to choose from. Same price regardless. “It was as if you could buy flood insurance on the house in the valley for the same price as flood insurance on the house on the mountaintop.”
He played dumb deliberately. “How do you do this again?” This was a man who had read more mortgage bond prospectuses than anyone alive, pretending he barely understood the product.
By end of July 2005, he owned $750 million in credit default swaps. By October, over a billion dollars.
His Own Investors Thought He Was Crazy
His investors were happy when he was picking stocks. When he told them about the billion-dollar housing bet, they freaked out. “Mike’s the best stock picker anyone knows. And he’s doing…what?”
He tried to raise a separate fund called Milton’s Opus. When people asked what that meant, he’d say “Paradise Lost.” That raised more questions than it answered. The fund died quickly. Worse, investors he’d pitched took his idea to Goldman Sachs and tried to replicate it without him.
“Early on, people invested in me because of my letters,” he said. “And then somehow after they invested, they stopped reading them.”
The First Signs of Vindication
By late 2005, something shifted. Deutsche Bank suddenly wanted to buy back his swaps. Goldman Sachs called on a personal cell phone so the conversation wouldn’t be recorded. “Management is concerned,” the saleswoman said. Bank of America wouldn’t sell him more insurance. Morgan Stanley wanted to buy what he already had.
The loans were starting to go bad. The Wall Street Journal ran an article about adjustable-rate mortgages defaulting at record rates. Then came one final email from an investor: Greg Lippmann, Deutsche Bank’s head subprime trader, had been going around telling people he was short a billion dollars and would make “oceans” of money. Lippmann had learned from Burry’s trade and copied it.
The one-eyed doctor, sitting alone in San Jose, reading documents nobody else would read, had seen what the entire financial world missed. He was king in the land of the blind. It just took a while for anyone to notice.
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