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15th June 2020


Michael Burry came to prominence shortly after the 2008/2009 crash, when it emerged that he was one of the very few to predict the catastrophic near-collapse of the financial system. Burry discovered that investments called ‘Collateralized Debts Obligations’ or ‘CDOs’, which had become very popular, were getting low risk ratings from the main credit rating agencies, Standard & Poors and Moodys, that were unjustified.


Collateralized Debt Obligations (CDO), also called Collateralized Loan Obligations or Collateralized Mortgage Obligations, are created when a bank sells a package of its loans. The buyer of the CDO then  receives the interest and capital repayments instead of the bank. However, as the bank had sold on these loans, it could then lend out the money again to new clients without breaching its capital adequacy requirements.


The majority of these CDOs got low risk ratings from the credit rating agencies, but Burry did not rely on this. Instead he took the time and the trouble to investigate the actual make up of these CDOs and he found that many of the underlying borrowers were under pressure and likely to default.


How did the investment banks that brokered many of these CDO deals between the sellers (the retail banks) and the buyers (investment institutions), manage to deceive the credit rating agencies into believing that these investments were low risk? The jury is still out on that one, but one technique was to include some loans of poor quality in an overall package that mostly consisted of good quality loans. Of course, as more and more of these deals were being done, the low quality content invariably increased. Also some commentators argue that there was a conflict of interest, as the investment banks and the retail banks, collectively pay the credit rating agencies to rate these investment instruments.

Anyway, this was one of the key factors that threw more oil on the fire back in 2008/2009, but Burry saw it coming and profited by shorting these investments. His exploits (together with the exploits of a handful of other investors who predicted the extent of the financial crash) are described in Michael Lewis’s book ‘The Big Short’ which has also been made into a movie.

Michael Burry manages a hedge fund called Scion Asset Management. If one presumes that he remains as diligent and independently minded now as he was pre 2008/2009, then any stocks he invests in could be worth checking out. Recent SEC filings have revealed that he made significant new investments at end of May 2020 in the following five stocks:-


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