'Big Short' investor Michael Burry shared the thinking behind his iconic bet against the housing bubble - and reflected on his GameStop wager

Michael Burry Getty — Michael Burry.
Photo by Kevin Mazur/WireImage

Michael Burry sounded the alarm on the US housing bubble in an email in 2005.
"The Big Short" investor highlighted risky loans and complacent credit-rating agencies.
Burry predicted the housing market would crash and made a fortune betting on that outcome.
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Michael Burry, the contrarian investor of "The Big Short" fame, shared some of the early research that underpinned his billion-dollar bet against the US housing bubble in the mid-2000s.

"June 6, 2005, racing through the rabbit hole," the Scion Asset Management boss said in a since-deleted tweet this week, attaching a screenshot of an email he sent to analysts on that date. Burry told them he was exploring an investment in credit default swaps linked to mortgage-backed securities, and had spotted a raft of red flags while digging through about 25 prospectuses over the past few days.

The Scion boss called out the credit-rating agencies for being complacent. They had graded the riskiest parts of the securities as "BBB" or investment-grade, and slapped an "AAA" rating on the safest 80% despite the fact they were "subprime structures through and through," he said.

Burry noted that 20% of the securities were tied to interest-only mortgages, between 50% and 70% were linked to cash-out refinancing where homeowners replaced their mortgages with bigger ones, and 30% to 40% of the borrowers involved had mediocre FICO credit scores of below 600.

Between 15% and 25% of the home loans were in excess of 90% loan-to-value, Burry said. He added that 40% of the loans had second liens, meaning another loan would be paid off first if the borrower declared insolvency.

Meanwhile, the spreads on the "BBB" securities were 150 basis points versus 300 basis points a year earlier, he pointed out, suggesting investors didn't view the products as particularly risky.

"I cannot believe how widespread the assumption is that housing will not crash," Burry said in the email, adding that synthetic collateralized debt obligations (CDOs) arriving that summer would make it cheaper and easier for institutions to get involved. "It's just insane."

Burry recalled people asserting the Bay Area housing market was in a bubble in 1998, but he disagreed as lenders weren't being reckless and irresponsible at the time.

"Well, about two years ago they started doing crazy things, and today that's about all they do," he said.

Looking back at GameStop

Burry appears to be in a nostalgic mood. Earlier this week, he shared another email from 2005 detailing his idea to short the subprime-mortgage market. In a follow-up tweet, he reflected on his GameStop bet, which laid the groundwork for the short squeeze on the video-game retailer's stock in January, and helped spur the meme-stock boom

"Back when GameStop was an interesting and rational long... #GMESQUEEZE," the investor said. He attached a screenshot of some buyback calculations he made in late 2019, when the video game retailer's stock was trading below $6 a share - less than 1/33 of its roughly $200 price tag today.

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