That doesn't justify what he did. The right thing to do would have been to let people know of what was happening. Just because the financial system rewards greed/selfishness does not mean people shouldn't act ethically when the consequences of their actions could mean the loss of hard earned money by honest hard working people with families, medical expenses, college loans, etc. Then again the guy has Asperger's syndrome so most of the ethics and empathy is probably lost on him.
I attended a talk by Michael Lewis a little over a year ago. One of the questions I asked him was whether or not he believed financial journalists dropped the ball with reporting on the bubble that led up to the crisis.
Lewis made the point that many journalists had in fact written stories about the real estate excess but those stories were simply ignored.
In addition, if you read The Greatest Trade, you will see that while Burry was pretty early, he was by no means the first to call the trade.
One company I own shares in, chose to publicly detail a very similar CDS trade in their 2006 letter to shareholders. This was before CDS prices skyrocketed and left any investor with ample opportunity to protect themselves from the fall out. At the time, it only cost $1 to $1.5M to buy $100M of protection on banks such as Lehman Brothers or Bear Stearns defaulting.
Most people just choose to ignore the possibility of a bubble bursting. They think the music will keep playing. I remember when I was buying shares in the above mentioned company back in the summer of 2007, when we started seeing subprime's true problems via the troubles at New Century Financial and others. Most commentators and analysts stupidly believed that the problems would not spread beyond subprime mortgage borrowers. But if you had looked at the data, you would have seen that as a result of the leverage employed, by multiple parties, things were much more intertwined.
He had no prestige, no mouthpiece, and no people skills. What was he supposed to do, stand on the sidewalk with a sign saying, "The sky is falling?" He made a crapload of money seeing through the hype while everyone else thought the only way to make money was to ride the bubble even if they didn't believe in it. He set an excellent example. Next time, if there are more people like him, the bubble won't grow so far out of proportion with reality.
The politicians were warned over and over again. They denied that any problem even existed. Here's what Barney Frank had to say:
For example, during a hearing on September 10, 2003, before the House Committee on Financial Services considering a Bush administration proposal to further regulate Fannie and Freddie, Rep. Frank stated: "I want to begin by saying that I am glad to consider the legislation, but I do not think we are facing any kind of a crisis. That is, in my view, the two Government Sponsored Enterprises we are talking about here, Fannie Mae and Freddie Mac, are not in a crisis. We have recently had an accounting problem with Freddie Mac that has led to people being dismissed, as appears to be appropriate. I do not think at this point there is a problem with a threat to the Treasury."
"I worry, frankly, that there's a tension here. The more people, in my judgment, exaggerate a
threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disastrous scenarios. And even if there were a problem, the Federal Government doesn't bail them out . But the more pressure there is there, then the less I think we see in terms of affordable housing."
Rep. Barney Frank (D., Mass.)
House Financial Services Committee hearing
Sept. 10, 2003
"I think this is a case where Fannie and Freddie are fundamentally sound, that they are not in danger of going under. They're not the best investments these days from the long- term standpoint going back. I think they are in good shape going forward. They're in a housing market. I do think their prospects going forward are very solid. And in fact, we're going to do some things that are going to improve them."
Rep. Barney Frank (D., Mass.)
July 14, 2008
"I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.
I urge my colleagues to support swift action on this GSE reform legislation."
John McCain
May 26, 2006
Here are some additional quotes from the Fannie/Freddie Fraud Investigation in 2004
BAKER (R-LA): It is indeed a very troubling report, but it is a report of extraordinary importance not only to those who wish to own a home, but as to the taxpayers of this country who would pay the cost of the clean up of an enterprise failure.
WATERS (D-CA): Through nearly a dozen hearings where, frankly, we were trying to fix something that wasn't broke, Mr. Chairman, we do not have a crisis at Freddie Mac, and particularly at Fannie Mae, under the outstanding leadership of Mr. Frank Raines.
MEEKS (D-NY): As well as the fact that I'm just pissed off at OFHEO, because if it wasn't for you, I don't think that we'd be here in the first place, and now the problem that we have and that we're faced with is: maybe some individuals who wanted to do away with GSEs in the first place, you've given them an excuse to try to have this forum so that we can talk about it and maybe change the, uh, the direction and the mission of what the GSEs had, which they've done a tremendous job. There's been nothing that was indicated that's wrong, you know, with Fannie Mae! Freddie Mac has come up on its own. And the question that then presents is the competence that -- that -- that -- that your agency uh, uh, with reference to, uh, uh, deciding and regulating these GSEs. Uh, and so, uh, I wish I could sit here and say that I'm not upset with you, but I am very upset because, you know, what you do is give -- you know, maybe giving any reason to, as Mr. Gonzales said, to give someone a heart surgery when they really don't need it.
ROYCE (R-CA): In addition to our important oversight role in this committee, I hope that we will move swiftly to create a new regulatory structure for Fannie Mae, for Freddie Mac, and the federal home loan banks.
CLAY (D-MO): This hearing is about the political lynching of Franklin Raines.
FALCON (OFHEO Regular to MEEKS (D-NY)): Sir, Congressman, OFHEO did not improperly apply accounting rules. Freddie Mac did. OFHEO did not fail to manage earnings properly. Freddie Mac did. So this isn't about the agency engaging in improper conduct. It's about Freddie Mac.
SHAYS (R-CT): Fannie Mae has manipulated, in my judgment, OFHEO for years -- and for OFHEO to finally come out with a report as strong as it is, tells me that's got to be the minimum, not the maximum.
FRANK (D-MA): ...etcetera. Uh, I -- This -- You -- you -- you seem to me saying, "Well, these are areas which could raise safety and soundness problems." I don't see anything in your report that raises safety and soundness problems.
WATERS (D-CA): Under the outstanding leadership of Mr. Frank Raines, everything in the 1992 has worked just fine. In fact, the GSEs have exceeded their housing goals. What we need to do today is to focus on the regulator, and this must be done in a manner so as not to impede their affordable housing mission, a mission that has seen innovation flourish from desktop underwriting to 100% loans.
MANZULLO (R-IL): Mr. Raines, 1.1 million bonus and a $526,000 salary. Jamie Gorelick, $779,000 bonus on a salary of 567,000. This is -- what you state on page 11 is nothing less than -- than staggering. The 1998 earnings per share number turned out to be $3.23 and 9.mills, a result that Fannie Mae met the EPS maximum payout goal right down to the penny. Fannie Mae understood the rules and simply chose not to follow them. If Fannie Mae had followed the practices, there wouldn't have been a bonus that year.
RAINES: Because banks don't -- there aren't any banks who only have multifamily and single-family loans. These assets are so riskless that their capital for holding them should be under 2%.
CLINTON: The responsibility that the Democrats have may rest more in resisting any efforts by Republicans in the Congress or by me when I was president to put some standards and tighten up a little on Fannie Mae and Freddie Mac.
There was another hedge fund guy in Dallas who made billions betting against mortgage securities, just like this guy. But before he invested, he spent years explaining to everyone that the mortgage market was doomed. People laughed at him. He finally placed his bets and ended up being right.
From your comments, you have a fundamental misunderstanding about how these markets work. Investors in CDSes don't cause anything to happen. It's like betting on a horse race. Your money has no impact on how fast the horses run. If you want to be mad at someone, why don't pension fund managers hire analysts to do their own research rather than blindly trust the sharks on Wall St.? Ultimately, it's their fault for losing everyone's money. Wall St. merely sells the products that people want.
