Michael Burry became famous overnight when Michael Lewis released his best-seller, The Big Short. Burry who suffers from Aspergers, was originally a resident and planned on becoming a Medical Doctor. He decided to quit the field and formed Scion Capital in 2000.Scion produced high returns on value stocks, before turning his attention to the housing bubble in 2005. Burry was portrayed by Lewis as one of the “heroes” of the book, who made his clients $700millions by shorting sub-prime. As early as 2005, Burry recognized the coming housing bubble. Burry convinced Goldman Sachs to sell him Credit Default Swaps (CDSs) on subprime loans, which he thought would default.
Michael Burry was asked to provide testimony before the Financial Crisis Inquire Commission (FCIC). Below is the transcript verbatim. The transcript will sound a bit informal as Burry at times sounds a bit awkward switching topics due to his illness, but I wished to keep the transcript as close to its original form as possible. For the readers’ convenience, I have provided the testimony both in scribd format and in full text below.
Michael Burry Transcription FCIIC
The FCIC, the statute that created us tells to figure out the cause of the financial crisis in a whopping 18 months and tells us to look in various areas including securitizations and derivatives and that is why we are talking to and getting documents and information from various issuers, various hedge funds, various collateral managers, and et cetera, and you are one of the folks we decided to talk to because we read about you in “The The Big Short.” And we saw your appearance on 60 minutes. So thank you for coming in and what I wanted to do first that I do with everyone is can you just give me a quick background really quickly from college forward and after your attorney makes a statement.
MB (Attorney): No, I don’t want to make any statement. Can we just identify everyone?
FCIC: Oh, Sure. Let’s Just Go Around
I’m Sarah Knaus. I’ll be taking the notes today.
Kim Shaffer of the Structured Products Background (inaudiable).
And, Tim Colman, Mia Havel, Jonathon Wear, And you know Dr. Michael Burry.
And Everyone here is with the FCIC.
FCIC: So with that, just give us your background and from college, educational background from college and work background.
MB: So, sure college was under-graduate at UCLA and I had a bachelor’s of arts in economics I then preceded to the Vanderbilt school of medicine for an MD. I did a year of internship in internal medicine at the University of Tennessee hospital, and then I spent two years doing residency at Stanford hospital residency. After which I started Scion Capital which is (inaudible) was a hedge fund firm and I ran that until 2008.
FCIC: Um… OK we’ve had a chance to look at some of the documents which you’ve sent us and we thank you for those and what I’d like to do first is can you just walked me through the columns on this so that I know I’m actually reading it correctly? So if you could just identify with the various columns mean…
MB: OK, so intech steel. Intech is a data provider for these mortgage pools and this is just an Intech deal number was really important is that last part that nine and seven that tells you that tranche deal it is. So these are RMBS, residential mortgage backed security. Most securities have a cusip number and so do these. Deal issue date that’s the date the deal was born. Again a lot of that is self-explanatory I think. Original certificate face value: So, that relates to tranche over here. Let’s look at just the first line that’s easy. M9 and nine was probably the BA2 or the BBB Minus Tranche. That troll much of this deal and original certificate face value of $11,968,000.00. How much more do you need?
FCIC: That’s enough for now. That Column.
MB: Current certificate balances as of the date and these are of the date January 4 2007. As of that date the current certificate balance is the same as there’s been no write-downs or changes in the amount of the certificate. So signed original total combines additional exposure so, originally when we first participated… purchased protection on the nine tranche of this deal we purchased $10,000,000 worth. And as of January 4, 2007 in the next column: H we still have $10,000,000 of protection. Again, that’s notional exposure, that’s not actually what it’s worth; notional exposure protection or value protection. The total original loan balance and that’s the total number… the total amount of dollars of loans and the deal and not just the M9 tranche that would be something approximating the original certificates face value.
FCIC: Isn’t that the same as the face value of the entire securitization?
MB: Not necessarily. The total current loan balance as of that date is $429,028,969.00 So, the deal overall has been paid down typically through they refinanced it so you get the payments. So that’s where the deal stands. The tranche is um… the current balance is still 11,968,000.00. But the whole deal has come down some. So the um… Then there is counterparty position and so… their abbreviated, so in this column its fairly self-explanatory like the major dealers on Wall Street so now that’s MS is Morgan Stanley, GS is Goldman Sachs, BARC is Barclays, ML as Merrill Lynch, B of A. I’ll go through them. A lot of those same…
FCIC: Sure. So these are all CDS positions?
MB: So what these are … These represent the… This is data regarding the tranche in the deal that was shorted and you can see over here in the counterparty position where is says GS-10. Let’s look at the column… or rather row five, column K. It says barc dash five, ms – five, GS – 15. Oh so our exposure there is actually 25,000,000 and it’s split up five million and Barclays five million and Morgan Stanley 15,000,000 in Goldman Sachs. So those we different positions obviously so it’s not that these are each one of our positions because we have… within each one of these we could have multiple positions.
FCIC: Right but for example on the first one for the first Goldman deal listed on the sheet it means that you bought $10,000,000 CDS on the M9 tranche, right?
MB: We bought a credit default swap for protection with notional value of $10,000,000. So we didn’t actually paid $10,000,000.
FCIC: I understand. And, there is nothing on the sheet that says what the premium payments were correct?
MB: Right, right.
FCIC: OK and I’d take it that when we see more than one counterparty listed that means when you originally purchased the protection you purchased it from three