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Michael Burry was as good as teed up to become a Wall Street villain. His quarterly letters to his investors, which Burry considered private, were now routinely leaked to the press. A nasty piece appeared in a trade journal, suggesting that he had behaved unethically in side-pocketing his bet, and Burry felt certain it had been planted by one of his own investors. "Mike wasn't paranoid," said a New York investor who observed the behavior of other New York investors in Scion Capital. "People really were out to get him. When he becomes a bad guy he becomes this greedy sociopath who is going to steal all the money. And he can always go back to being a neurologist. It was the first thing everyone jumped to with Mike: He was a doctor." Burry began to hear strange rumors about himself. He'd left his wife and gone into hiding. He had fled to South America. "It's an interesting life I'm leading lately," Burry wrote to one of the e-mail friends.

With all that has gone on recently, I've had the opportunity to talk with many of our investors, which is the first time I've done so in the history of the funds. I've been shocked by what I've heard. It appears that investors only have passingly paid attention to my letters, and many have been clinging to various rumors and hearsay in place of analysis or original thought. I've variably launched a private equity fund, tried to buy a Venezuelan gold company, launched a separate hedge fund called Milton's Opus, got divorced, got blown up, never disclosed the derivatives trade, borrowed $8 billion, spent much of the last two years in Asia, accused everyone but me on Wall Street of being idiots, siphoned off the capital of the funds into my personal account, and more or less turned Scion into the next Amaranth.* None of this is made up.

He'd always been different from what one might expect a hedge fund manager to be. He wore the same shorts and t-shirts to work for days on end. He refused to wear shoes with laces. He refused to wear watches or even his wedding ring. To calm himself at work he often blared heavy metal music. "I think these personal foibles of mine were tolerated among many as long as things were going well," he said. "But when things weren't going well, they became signs of incompetence or instability on my part--even among employees and business partners."

After the conference in Las Vegas the market had dropped, then recovered right through until the end of May. To Charlie Ledley at Cornwall Capital, the U.S. financial system appeared systematically corrupted by a cabal of Wall Street banks, rating agencies, and government regulators. To Steve Eisman at FrontPoint Partners, the market seemed mainly stupid or delusional: A financial culture that had experienced so many tiny panics followed by robust booms saw any sell-off as merely another buying opportunity. To Michael Burry, the subprime mortgage market looked increasingly like a fraud perpetrated by a handful of subprime bond trading desks. "Given the massive cheating on the part of our counterparties, the idea of taking the CDS[s] out of the side pocket is no longer worth considering," he wrote at the end of March 2007.

The first half of 2007 was a very strange period in financial history. The facts on the ground in the housing market diverged further and further from the prices on the bonds and the insurance on the bonds. Faced with unpleasant facts, the big Wall Street firms appeared to be choosing simply to ignore them. There were subtle changes in the market, however, and they turned up in Burry's e-mail in-box. On March 19 his salesman at Citigroup sent him, for the first time, serious analysis on a pool of mortgages. The mortgages were not subprime but Alt-A.* Still, the guy was trying to explain how much of the pool consisted of interest-only loans, what percentage was owner-occupied, and so on--the way a person might do who actually was thinking about the creditworthiness of the borrowers. "When I was analyzing these back in 2005," Burry wrote in an e-mail, sounding like Stanley watching tourists march