The Big Short_ Inside the Doomsday Machine - Michael Lewis [91]
In the middle of 2006, he began to hear of other money managers who wanted to make the same bet he did. A few actually called and asked for his help. "I had all these people telling me I needed to get out of this trade," he said. "And I was looking at these other people and thinking how lucky they were to be able to get into this trade." If the market had been at all rational it would have blown up long before. "Some of the biggest funds on the planet have picked my brain and copied my strategy," he wrote in an e-mail. "So it won't just be Scion that makes money if this happens. Still, it won't be everyone."
He was now undeniably miserable. "It feels like my insides are digesting themselves," he wrote to his wife in mid-September. The source of his unhappiness was, as usual, other people. The other people who bothered him the most were his own investors. When he opened his fund, in 2000, he released only his quarterly returns, and told his investors that he planned to tell them next to nothing about what he was up to. Now they were demanding monthly and even fortnightly reports, and pestered him constantly about the wisdom of his pessimism. "I almost think the better the idea, and the more iconoclastic the investor, the more likely you will get screamed at by investors," he said. He didn't worry about how screwed-up the market for some security became because he knew that eventually it would be disciplined by logic: Businesses either thrived or failed. Loans either were paid off or were defaulted upon. But these people whose money he ran were incapable of keeping their emotional distance from the market. They were now responding to the same surface stimuli as the entire screwed-up subprime mortgage market, and trying to force him to conform to its madness. "I do my best to have patience," he wrote to one investor. "But I can only be as patient as my investors." To another griping investor he wrote, "The definition of an intelligent manager in the hedge fund world is someone who has the right idea, and sees his investors abandon him just before the idea pays off." When he was making them huge sums of money, he had barely heard from them; the moment he started actually to lose a little, they peppered him with their doubts and suspicions:
So I take it the monster dragging us out to sea is the CDS. You have created the plight of the old man and the sea.
When do you see the end of the bleeding? (August down again 5%.) Are you running a riskier strategy now?
You make me physically ill.... How dare you?
Can you explain to me how we keep losing money on this position? If our potential losses are fixed it would seem to me based on how much we have lost that they should be a tiny part of the portfolio now.
This last question kept popping up: How could a stock picker be losing so much on this one quixotic bond market bet? And he kept trying to answer it: He was committed to paying annual premiums amounting to about 8 percent of the portfolio, every year, for as long as the underlying loans existed--likely around five years but possibly as long as thirty. Eight percent times five years came to 40 percent. If the value of the credit default swaps fell by half, Scion registered a mark-to-market loss of 20 percent.
More alarmingly, his credit default swap contracts contained a provision that allowed the big Wall Street firms to cancel their bets with Scion if Scion's assets fell below a certain level. There was suddenly a real