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By Root 342 0

in Las Vegas that Steve Eisman had walked out of, after raising his zero in the air. Most of the loans had been made between April and July of 2005. From January to June 2007, the news from the pool--its delinquencies, its bankruptcies, its house foreclosures--had remained fairly consistent. The losses were much greater than they should have been, given the ratings of the bonds they underpinned, but the losses did not change a great deal from one month to the next. From February 25 to May 25 (the remittance data always came on the twenty-fifth of the month), the combined delinquencies, foreclosures, and bankruptcies inside OOMLT 2005-3 rose from 15.6 percent to 16.9 percent. On June 25 the total number of loans in default spiked to 18.68 percent. In July it spiked again, to 21.4 percent. In August it leapt to 25.44 percent, and by the end of the year it stood at 37.7 percent--more than a third of the pool of borrowers had defaulted on their loans. The losses were sufficient to wipe out not only the bonds Michael Burry had bet against but also a lot of the more highly rated ones in the same tower. That the panic inside Wall Street firms had begun before June 25 suggested to Michael Burry mainly that the Wall Street firms might be working with inside information about the remittance data. "The dealers often owned [mortgage] servicers," he wrote, "and might have been able to get an inside track on the deterioration in the numbers."

In the months leading up to the collapse of OOMLT 2005-3--and all of the other pools of home loans he had bought credit default swaps on--Michael Burry noted several remarks from both Ben Bernanke and the Secretary of the U.S. Treasury, Henry Paulson. Each said, repeatedly, that he saw no possibility of "contagion" in the financial markets from the losses in subprime mortgages. "When I first started shorting these mortgages in 2005," Burry wrote in an e-mail, "I knew full well that it was not likely to pay out within two years--and for a very simple reason. The vast majority of mortgages originated the last few years had a rather ominously attractive feature called the 'teaser rate period.' Those 2005 mortgages are only now reaching the end of their teaser rate periods, and it will be 2008 before the 2006 mortgages get there. What sane person on Earth would confidently conclude in early 2007, smack dab in the midst of the mother of all teaser rate scams, that the subprime fallout will not result in contagion? The bill literally has not even come due."

Across Wall Street, subprime mortgage bond traders were long and wrong, and scrambling to sell their positions--or to buy insurance on them. Michael Burry's credit default swaps were suddenly fashionable. What still shocked him, however, was that the market had been so slow to assimilate material information. "You could see that all these deals were sucking wind leading up to the reset date," he said, "and the reset just goosed them into another dimension of fail. I was in a state of perpetual disbelief. I would have thought that someone would have recognized what was coming before June 2007. If it really took that June remit data to cause a sudden realization, well, it makes me wonder what a 'Wall Street analyst' really does all day."

By the end of July his marks were moving rapidly in his favor--and he was reading about the genius of people like John Paulson, who had come to the trade a year after he had. The Bloomberg News service ran an article about the few people who appeared to have seen the catastrophe coming. Only one worked as a bond trader inside a big Wall Street firm: a formerly obscure asset-backed bond trader at Deutsche Bank named Greg Lippmann. FrontPoint and Cornwall were both missing from the piece, but the investor most conspicuously absent from the Bloomberg News article sat alone in his office, in Cupertino, California. Michael Burry clipped the article and e-mailed it around the office with a note: "Lippmann is the guy that essentially took my idea and ran with it. To his credit." His own investors, whose money he was doubling