The Man Who Shorted the Housing Market

How Michael Burry Saw What No One Else Did and Made $700 Million

In 2005, long before the world had ever heard of subprime mortgages, a reclusive hedge fund manager named Michael Burry was poring over spreadsheets late into the night. While most of Wall Street was celebrating the unprecedented rise in housing prices, Burry was noticing something strange: cracks in the foundation.

The Unseen Opportunity

Burry, a former neurologist turned investor, was the founder of Scion Capital, a small hedge fund managing less than $500 million. Known for his unconventional thinking and obsessive research, Burry was not one to follow the herd. When he began analyzing mortgage-backed securities (MBS) in 2005, he discovered a troubling trend. Many of these securities were based on subprime loans — risky mortgages given to borrowers with poor credit histories. Worse, the terms of these loans often included hidden rate hikes that would make them unaffordable within a few years.

Convinced that the housing market was a bubble about to burst, Burry devised a bold plan: he would bet against the subprime market by purchasing credit default swaps (CDS). These instruments would pay off if the underlying mortgage securities defaulted.

The Bet of a Lifetime

Burry approached major banks like Goldman Sachs and Deutsche Bank, offering to buy CDS contracts on billions of dollars' worth of subprime mortgages. At the time, the idea seemed ludicrous. The housing market had been rising steadily for years, and Wall Street firmly believed it would continue to do so. But Burry was undeterred. By 2007, Scion Capital had spent nearly $1.8 billion on CDS contracts, locking in what seemed like an insane gamble.

His investors were furious. They couldn’t understand why Burry was paying millions in premiums for insurance on bonds that appeared rock-solid. Many demanded their money back. But Burry refused to back down, confident that the collapse was imminent.

The Crash

In late 2007, the cracks Burry had seen finally widened into chasms. As housing prices began to plummet, subprime borrowers defaulted on their mortgages en masse. The value of mortgage-backed securities collapsed, and the CDS contracts Burry had purchased skyrocketed in value.

By the end of 2008, Scion Capital had made $700 million in profits, including $100 million for Burry personally. The once-derided hedge fund manager was now hailed as a genius, his prescient bet immortalized in Michael Lewis’s book The Big Short and its subsequent film adaptation.

The Legacy

Burry’s story is a testament to the power of independent thinking and rigorous analysis. While the rest of Wall Street was blinded by groupthink and greed, he had the courage to follow his convictions, even when it meant standing alone.

Today, Burry remains a prominent, if enigmatic, figure in finance. His story serves as both inspiration and warning: sometimes the biggest risks lie in what everyone else believes to be safe.

Hungry for more market drama? Subscribe to Market Legends and discover the traders who played with fire — and got burned.