The Big Short Chapter 8: The Long Quiet - Being Right Too Early
There is an old saying in science: being right too early is indistinguishable from being wrong. Chapter 8 of The Big Short is basically that saying stretched into the most painful period of Michael Burry’s life. And honestly, reading it felt personal. Because anyone who has ever been the only person in the room who sees a problem - and then gets punished for pointing it out - will recognize every single page of this chapter.
The Man Who Knew Too Much, Too Soon
Let’s rewind a bit. By early 2007, Michael Burry had been betting against subprime mortgage bonds for almost two years. He was the first investor to identify the whole mess, back in 2003, when he noticed that complicated financial instruments were being invented for one purpose only: to lend money to people who could never pay it back. By spring 2005, he had put real money behind his conviction. $1.9 billion worth of credit default swaps in a portfolio of $555 million.
And then he waited.
The loans were defaulting in record numbers. Financial institutions were shaking. Everything he predicted was happening. But his bets were not paying off. In fact, according to the marks that Goldman Sachs and Morgan Stanley were giving him, he was losing money.
How is that possible? How do you bet that something will fail, it fails, and you still lose?
Welcome to Wall Street.
The Market That Wasn’t a Market
Here is the thing that drove Burry crazy - and honestly drives me crazy just reading about it. The credit default swap market was not an actual market in any meaningful sense. There was no exchange, no transparent pricing, no independent arbiter of value. The price of Burry’s bets was whatever Goldman Sachs and Morgan Stanley said it was. Every day, at the end of the day, these banks decided whether his positions had gained or lost value.
And what do you think they decided?
Burry noticed the pattern immediately. Any good news about housing was treated as a reason to demand more collateral from him. Any bad news - like mortgage lenders going bankrupt - was dismissed as irrelevant to his specific positions. The banks claimed they had no stake in the outcome, that they were just neutral middlemen. Their behavior said otherwise.
As Burry wrote to his lawyer: “Whatever they’ve got on their book will be their view. Goldman happens to be warehousing a lot of this risk.”
Burry actually tried to call their bluff. He asked the banks if they would sell him more credit default swaps at the prices they claimed they were worth. None of them would. Eighty to ninety percent of the instruments on his list weren’t even available at any price. The market was a fiction, and everyone maintaining the fiction was getting rich from it.
Investors Turn on Their Own Guy
Now here is where the human story gets really painful. Burry’s investors had watched him produce a 186 percent return over six years while the S&P 500 gave them about 10 percent. This man had made them very wealthy. But in 2006, as his credit default swaps were being marked against him, the fund showed an 18.4 percent loss for the year while the S&P rose 10 percent.
And his investors lost their minds.
The letters they sent him are something else:
“You make me physically ill…. How dare you?”
“So I take it the monster dragging us out to sea is the CDS. You have created the plight of the old man and the sea.”
Think about that for a second. A man who made you 186 percent, who explained exactly what he was doing and why, and you write him a letter saying he makes you physically ill. Because of one bad year. In which everything he predicted was actually starting to happen.
When people were getting rich from Burry, they barely contacted him. The moment he started losing a little, they peppered him with doubts, suspicions, and threats.
This is something I’ve seen many times in my career, in completely different fields. When you are right and things go well, everyone claims they always believed in you. When you are right but the timing is off, you are suddenly a fraud.
The Side-Pocket Gamble
Burry did something radical. His investment agreement gave him the right to lock up investor money if it was in “securities for which there is no public market.” He looked at his credit default swaps - instruments whose prices were being dictated by the very banks betting against him, in a market he believed was fraudulent - and he made a call. He side-pocketed them. Locked up 50 to 55 percent of his investors’ money.
In a terse letter, he told them they couldn’t have their money back until the bets played out.
Then he followed up with a quarterly letter that, in classic Burry fashion, was exactly the wrong tone. Instead of apologizing, he essentially told his investors they should feel lucky. He wrote about how he had “the short mortgage portfolio everyone would want if they knew what they were doing.” One of his friends told him, “Nobody except the North Korean dictator Kim Jong-Il would write a letter like that when they are down 17%.”
He had no talent for caring what others thought of him. It was almost as if he didn’t know how to do it.
And this is where the Asperger’s diagnosis comes in.
The Diagnosis That Explained Everything
In the middle of all this financial chaos, Burry’s wife took him to a Stanford psychologist. Their four-year-old son Nicholas was having trouble in preschool. He didn’t sleep when other kids slept. He drifted off when the teacher talked too long. His mind seemed “very active.”
Burry, being a doctor, was annoyed. He thought ADHD was overdiagnosed. He thought his son was just different in a good way. His kid asked a ton of questions. “I had encouraged that, because I always had a ton of questions as a kid, and I was frustrated when I was told to be quiet.”
His wife stared at him and asked: “How would you know?”
“Because he’s just like me! That’s how I was.”
The tests came back. Asperger’s syndrome. A classic case. And then Burry read the books his wife had stacked up for him, and something strange happened. He stopped reading about his son and started reading about himself.
“Marked impairment in the use of multiple non-verbal behaviors such as eye-to-eye gaze…” Check.
“Failure to develop peer relationships…” Check.
“One of the reasons why computers are so appealing is not only that you do not have to talk or socialize with them, but that they are logical, consistent and not prone to moods…” Check.
Here is a man at 35 years old, finding an instruction manual for his entire life. His glass eye, which he had always blamed for his social difficulties, suddenly explained nothing. How does a glass eye explain a competitive swimmer with a pathological fear of deep water? How does it explain a childhood obsession with washing dollar bills and pressing them in books until they looked new?
“All of a sudden I’ve become this caricature,” Burry said. “I always thought it was something special about me. Now it’s like, ‘Oh, a lot of Asperger’s people can do that.’”
It was a stroke of luck that his obsessive interest happened to be financial markets and not, say, collecting lawn mower catalogues. “Only someone who has Asperger’s would read a subprime mortgage bond prospectus,” he said.
Gotham Comes Knocking
The worst moment came when Joel Greenblatt, the man who had “discovered” Burry and backed him before anyone else, flew from New York to San Jose with his partner to confront him. Greenblatt had gone on television just ten months earlier and praised Burry as one of his favorite value investors. Now he was there to call Burry a liar and pressure him into giving back the $100 million Gotham had invested.
“If there was one moment I might have caved, that was it,” Burry said. “Joel was like a godfather to me.”
But Greenblatt asked to see the list of bonds Burry had bet against, and Burry refused. From Greenblatt’s side, this looked terrible. He had given this guy $100 million and the guy wouldn’t even show him what he bought. Lawsuits were threatened. Investors organized themselves into a legal fighting force.
Rumors spread. Burry had left his wife. He had fled to South America. He had launched a secret hedge fund called Milton’s Opus. He had siphoned off fund capital into his personal account.
None of it was true. But nobody was listening to him anymore.
And Then, Quietly, He Was Right
In the first half of 2007, the gap between reality and prices finally became too wide to ignore. On June 14, two Bear Stearns hedge funds loaded with subprime mortgage bonds blew up. In two weeks, the index of triple-B subprime bonds dropped nearly 20 percent.
Goldman Sachs suddenly had “systems failure.” Morgan Stanley had said more or less the same thing. Bank of America claimed they had a “power outage.” Burry saw these for what they were: excuses to buy time while they sorted out the catastrophe behind the scenes.
Goldman’s saleswoman tried to argue that the market for insuring subprime bonds hadn’t moved - but she called from her cell phone, not the office line where conversations were recorded.
By the end of June, the same banks that had been marking his positions against him for two years suddenly wanted to make sure “the marks are fair.” By July, everyone wanted to buy what he had “in any size.”
The first quarter of 2007: Scion Capital was up 18 percent. By mid-summer, his positions were doubling and more. He was reading articles about the “genius” of John Paulson, who had come to the same trade a year after Burry.
And his investors? The ones who had threatened lawsuits, called him a fraud, written that he made them physically ill?
“Nobody came back and said, ‘Yeah, you were right,’” Burry said. “It was very quiet. It was extremely quiet.”
The silence, he said, infuriated him.
What This Chapter Is Really About
I have thought about this chapter a lot. It’s not really about finance. It’s about what happens to a person who sees the truth before everyone else and refuses to pretend otherwise.
Burry’s Asperger’s made him brilliant at analyzing data and terrible at managing human relationships. He could read a subprime mortgage bond prospectus that would put anyone else to sleep. But he couldn’t write a letter to angry investors without sounding like he was insulting them. He couldn’t sit in a room with Joel Greenblatt and smooth things over.
But he was two years early on the biggest trade of his life, and during those two years, every human skill he lacked was the only thing that could have saved him from the psychological torture of being right and alone.
Lewis ends the chapter with Burry asking a question that still gives me chills. In July 2007, as the markets crashed, he wrote to his investors: “Why have we not yet heard of this era’s Long-Term Capital?”
He was asking where the big losers were. The funds and banks that had taken the other side of his bet. The answer was that they were everywhere. They just hadn’t admitted it yet.
The bill, as Burry put it, literally had not even come due.
Previous: Chapter 7: The Great Treasure Hunt