Did everybody miss the looming financial crisis? Michael J. Burry refuses to buy claims that “everybody missed it,” since he didn’t. He has company.
Michael J. Burry takes exception to Alan Greenspan’s protestations that the financial crisis was only knowable in hindsight. Mr. Burry tried mightily to call attention to the extreme risks posed by mortgage-backed securities, and saw the likelihood of a meltdown as so certain that he staked his reputation on it, placing huge bets for his hedge fund, Scion Capital. He was right, and Scion made bags of money for its investors. Mr. Burry’s position is summarized in “I Saw the Crisis Coming. Why Didn’t the Fed?” (New York Times, April 3, 2010) and his story is recounted in Michael Lewis’ “The Big Short: Inside the Doomsday Machine.”
Mr. Lewis’ work profiles Steve Eisman, Michael Burry and Jamie Mai & Charlie Ledley, all of whom realized that the financial meltdown was inevitable, and have the profits to show for their prescience. It turns out that the claim that “no one could have known” does not hold up.
There are others. They are part of the valuation profession. Real estate appraisers were not in a position to profit (at least in the context of their profession), nor were they considered helpful. Their work has been marginalized through the force of law, and any suggestion that their voices should be heard has been studiously ignored. Many knew of the bubble as it was occurring. While the analysis of Wall Street financial products continues, and while we try to craft regulations to block its wild and self-serving excesses, any effective solution should build in ways of pushing against asset bubbles directly, blocking the fuel for reckless CDOs and the like. My earlier post, “A Prophylactic Solution For Off-The-Chart Real Estate Risk” states the case.