Michael Burry / 2007 / Credit
The answer was in the loans.
Michael Burry and the work hidden beneath a reassuring label.
Before the outcome was obvious.
Burry’s mortgage short began with a less glamorous activity than predicting a crash: examining what sat inside mortgage-backed securities. The Financial Crisis Inquiry Commission describes the doctor-turned-investor’s bet against that market. The workbook centres his thesis on mortgage-pool analysis. The lesson is in the distance between a security’s label and the behaviour of its underlying borrowers. Finding that distance was research. Paying to maintain protection until the market recognised it was a different problem.
What could have gone wrong
Premium payments and investor pressure can exhaust the patience or capital available to a trade. A correct thesis can still arrive too early.
Read the underlying evidence, then make sure the structure can survive the wait.
Put the thesis to the test.
Change the assumptions and watch the arithmetic update. These are simplified scenarios; they do not recreate the instrument’s pricing or the path of the trade.
How this model works
Profit ratio = profit ÷ stated position. Exposure ratio = stated position ÷ fund assets. Neither is a measure of maximum loss or a net investor return.
The workbook’s simple annualisation is profit ratio × 365 ÷ duration = 26.9%. It is linear, not compounded, and is not a repeatable annual return. Fees, financing, collateral, premium carry and changing exposures are not modelled.
What these figures mean.
Source: Legendary Trades Models, Master Comparison!A7:L7; Trade P&L Models, case 4. The following are original workbook inputs, preserved for transparency. They are estimates, not independently audited results.
- Workbook position
- $1.3bn
- Workbook “gross profit”
- $700m
- Workbook duration
- 730 days
- Workbook fund assets
- $600m
- Workbook fund return
- 489%
- Workbook position ROI
- 53.8%
The fund-return field is a separate source claim, not a calculated result of this trade. Its reporting period and gross/net basis are not independently established here. Model ratios are recalculated from inputs rather than copied from rounded source ROI values.
Historical context: Financial Crisis Inquiry Commission · The madness, chapter 10 ↗. This source supports the context discussed above; it does not validate every workbook input.