The Big Short_ Inside the Doomsday Machine - Michael Lewis [90]
It was true, however, that his portfolio of credit default swaps was uncommon. They were selected by an uncommon character, with an uncommon view of the financial markets, operating alone and apart. This fact alone enabled Wall Street firms to dictate to him the market price. With no one else buying and selling exactly what Michael Burry was buying and selling, there was no hard evidence what these things were worth--so they were worth whatever Goldman Sachs and Morgan Stanley said they were worth. Burry detected a pattern in how they managed their market: All good news about the housing market, or the economy, was treated as an excuse to demand collateral from Scion Capital; all bad news was pooh-poohed as in some way irrelevant to the specific bets he had made. The firms always claimed that they had no position themselves--that they were running matched books--but their behavior told him otherwise. "Whatever the banks' net position was would determine the mark," he said. "I don't think they were looking to the market for their marks. I think they were looking to their needs." That is, the reason they refused to acknowledge that his bet was paying off was that they were on the other side of it. "When you talk to dealers," he wrote in March 2006 to his in-house lawyer, Steve Druskin, "you are getting the view from their book. Whatever they've got on their book will be their view. Goldman happens to be warehousing a lot of this risk. They'll talk as if nothing has been seen in the mortgage pools. No need to incite panic...and this has worked. As long as they can entice more [money] into the market, the problem is resolved. That's been the history of the last 3-4 years."
By April 2006 he'd finished buying insurance on subprime mortgage bonds. In a portfolio of $555 million, he had laid $1.9 billion of these peculiar bets--bets that should be paying off but were not. In May he adopted a new tactic: asking Wall Street traders if they would be willing to sell him even more credit default swaps at the price they claimed they were worth, knowing that they were not. "Never once has any counterparty been willing to sell me my list at my marks," he wrote in an e-mail. "Eighty to ninety per cent of the names on my list are not even available at any price." A properly functioning market would assimilate new information into the prices of securities; this multi-trillion-dollar market in subprime mortgage risk never budged. "One of the oldest adages in investing is that if you're reading about it in the paper, it's too late," he said. "Not this time." Steve Druskin was becoming more involved in the market--and couldn't believe how controlled it was. "What's amazing is that they make a market in this fantasy stuff," said Druskin. "It's not a real asset." It was as if Wall Street had decided to allow everyone to gamble on the punctuality of commercial airlines. The likelihood of United Flight 001 arriving on time obviously shifted--with the weather, mechanical issues, pilot quality, and so on. But shifting probabilities could be ignored, until the plane did or did not arrive. It didn't matter when big mortgage lenders like Ownit and ResCap failed, or some pool of subprime loans experienced higher than expected losses. All that mattered was what Goldman Sachs and Morgan Stanley decided should matter.
The world's single biggest capital market wasn't a market; it was something else--but what? "I am actually protesting to my counterparties that there must be fraud in the marketplace for credit default swaps to be at all-time lows," Burry wrote in an e-mail