[Mike Barry] wasn’t wasting a lot of time worrying about why these supposedly shrewd investment bankers were willing to sell him insurance so cheaply. He was worried that others would catch on and the opportunity would vanish. “I would play dumb quite a bit,” he said, “making it seem to them like I don’t really know what I’m doing. ‘How do you do this again?’ ‘Oh, where can I find that information?’ Or, ‘Really?’—when they tell me something really obvious.” It was one of the fringe benefits of living for so many years essentially alienated from the world around him: He could easily believe that he was right and the world was wrong.
And:
In the second quarter of 2005, credit card delinquencies hit an all-time high—even though house prices had boomed. That is, even with this asset to borrow against, Americans were struggling more than ever to meet their obligations. The Federal Reserve had raised interest rates, but mortgage rates were still effectively falling—because Wall Street was finding ever more clever ways to enable people to borrow money. Burry now had more than a billion-dollar bet on the table and couldn’t grow it much more unless he attracted a lot more money. So he just laid it out for his investors: The U.S. mortgage bond market was huge, bigger than the market for U.S. Treasury notes and bonds. The entire economy was premised on its stability, and its stability in turn depended on house prices continuing to rise. “It is ludicrous to believe that asset bubbles can only be recognized in hindsight,” he wrote. “There are specific identifiers that are entirely recognizable during the bubble’s inflation. One hallmark of mania is the rapid rise in the incidence and complexity of fraud.… The FBI reports mortgage-related fraud is up fivefold since 2000.” Bad behavior was no longer on the fringes of an otherwise sound economy; it was its central feature. “The salient point about the modern vintage of housing-related fraud is its integral place within our nation’s institutions,” he added.
And:
[Eisman] and Vinny and Danny had been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the triple-B tranche of subprime mortgage-backed bonds without fully understanding why those firms were so eager to accept them. Now he was face-to-face with the actual human being on the other side of his credit default swaps. Now he got it: The credit default swaps, filtered through the CDOs, were being used to replicate bonds backed by actual home loans. There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. Wall Street needed his bets in order to synthesize more of them. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” said Eisman. “They were creating them out of whole cloth. One hundred times over! That’s why the losses in the financial system are so much greater than just the subprime loans. That’s when I realized they needed us to keep the machine running. I was like, This is allowed?”
And:
The first half of 2007 was a very strange period in financial history. The facts on the ground in the housing market diverged further and further from the prices on the bonds and the insurance on the bonds. Faced with unpleasant facts, the big Wall Street firms appeared to be choosing simply to ignore them. There were subtle changes in the market, however, and they turned up in Burry’s e-mail in-box. On March 19 his salesman at Citigroup sent him, for the first time, serious analysis on a pool of mortgages. The mortgages were not subprime but Alt-A. Still, the guy was trying to explain how much of the pool consisted of interest-only loans, what percentage was owner-occupied, and so on—the way a person might do who actually was thinking about the creditworthiness of the borrowers. “When I was analyzing these back in 2005,” Burry wrote in an e-mail, sounding like Stanley watching tourists march through the jungle on a path he had himself hacked, “there was nothing even remotely close to this sort of analysis coming out of brokerage houses. I glommed onto ‘silent seconds’ as an indicator of a stretched buyer and made it a high-value criterion in my selection process, but at the time no one trading derivatives had any idea what I was talking about and no one thought they mattered.” In the long quiet between February and June 2007, they had begun to matter. The market was on edge.
More (#4) from The Big Short:
And:
And:
And: