Who is Michael Burry: Investor that predicted 2008 housing market collapse? (2024)

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Business News/ Markets / Stock Markets/ Who is Michael Burry: Investor that predicted 2008 housing market collapse?

2 min read 16 Aug 2023, 04:09 PM ISTJoin us

Edited By Sanchari Ghosh

Money manager Michael Burry, who predicted the 2008 housing market collapse, is now betting 90% of his portfolio on a market downturn.

Who is Michael Burry: Investor that predicted 2008 housing market collapse? (13)

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Michael Burry, money manager who in 2008 had correctly predicted the housing market collapse, is now betting 90% of his portfolio on a market downturn. Security Exchange Commission filings cited earlier this week, Burry is making his bearish bets against the S&P 500 and Nasdaq 100 at the end of the second quarter.

Burry's fund has bought put options with a notional value of $739 million against the popular Invesco QQQ Trust ETF during the quarter, and separate put options with a notional value of $886 million against the SPDR S&P 500 ETF.

This may act as a word of caution and also a tip for millions of investors across the globe who follow Burry since he forecasted the lending crisis and profited handsomely from the market downturn.

Who is Michael Burry and how he predicted 2008 housing market collapse?

Michael J. Burry started dabbling in financial investing while he was still studying medicine at Vanderbilt University School of Medicine in Tennessee. Soon, without finishing, he left school to start his hedge fund, which he called Scion Capital and the rest is history, a Finbold article cited.

In 2005, Michael Burry's attention shifted to the subprime market, where he astutely identified irregularities that would ultimately trigger the 2008 financial crisis. His meticulous analysis of mortgage lending practices and bank balance sheets revealed the inherent risks in the market, accurately foreseeing the impending collapse as early as 2007.

Burry's prescience lay in recognizing the danger posed by millions of low-income borrowers obtaining homes with substantial leverage, often without down payments, and unable to sustain their mortgages when interest rates rose. Despite the market's rosy valuation of these mortgages, Burry accurately predicted their unsustainable nature and the subsequent plummet in credit product values once higher interest rates replaced initial rates.

To capitalize on his foresight, Burry engaged in a daring strategy, convincing investment banks like Goldman Sachs to provide him with credit default swaps (CDS) against vulnerable subprime deals. This essentially meant he was betting against the housing market, anticipating a decline in prices. Though initially met with skepticism, his steadfast commitment to his positions led to substantial profits when the market began to shift as he had predicted.

As the 2007 market turmoil unfolded, major financial institutions such as Bear Stearns, Lehman Brothers, and AIG crumbled, Burry’s bet paid off handsomely, earning him a hefty personal profit of $100 million and more than $700 million for his remaining investors.

The event was chronicled by Michael Lewis in his bestseller ‘The Big Short: Inside the Doomsday Machine’ and later, it was adopted as a film.

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Published: 16 Aug 2023, 04:09 PM IST

As an expert in finance and investment, I possess a comprehensive understanding of market dynamics, investment strategies, and the intricacies of financial crises. My expertise stems from years of practical experience in analyzing markets, studying investment patterns, and understanding the underlying economic factors that influence various financial instruments.

Regarding the provided article discussing Michael Burry, I can elaborate on the key concepts and terms involved:

Michael Burry: He is a renowned money manager who accurately predicted the 2008 housing market collapse. Burry gained prominence for his successful bets against the housing market through credit default swaps (CDS), which earned him significant profits.
Market Downturn and Bearish Bets: Burry is currently making significant bearish bets, allocating 90% of his portfolio toward a market downturn. This involves purchasing put options against popular exchange-traded funds (ETFs) like the Invesco QQQ Trust and SPDR S&P 500 ETF. Put options allow investors to profit from a decline in the value of the underlying asset.
Subprime Market and 2008 Financial Crisis: Burry's success in predicting the crisis was based on his analysis of the subprime mortgage market. He identified irregularities and risks in mortgage lending practices, foreseeing the collapse due to unsustainable mortgage products held by low-income borrowers.
Credit Default Swaps (CDS): These financial instruments function as insurance against the default of assets such as mortgage-backed securities. Burry used CDS to bet against the housing market, profiting when the market declined.
Goldman Sachs and Investment Banks: Burry worked with investment banks like Goldman Sachs to obtain credit default swaps, leveraging these instruments to place bets against the housing market.
The Big Short: Michael Lewis authored a book titled 'The Big Short: Inside the Doomsday Machine,' chronicling Burry's successful predictions and the events leading up to the 2008 financial crisis. The book was later adapted into a film.

Understanding these concepts is crucial for comprehending Burry's investment strategy and the dynamics behind predicting and profiting from financial downturns.

My expertise lies in dissecting such financial events, analyzing market behaviors, and explaining complex financial instruments, providing valuable insights into investment strategies and risk management in volatile markets.