Michael Burry on the Financial Crisis, the Housing Market, and the Fed

Michael Burry, the former head of Scion Capital LLC who predicted the housing market’s plunge, talks with Bloomberg Television’s Jon Erlichman about the financial crisis, the housing market, the Federal Reserve and his investments. Burry was featured in Michael Lewis’  “The Big Short” as one of four sets of players in the subprime mortgage market who had the foresight and gumption to short the diciest mortgage deals.

Here are the key highlights from the interview, courtesy of Bloomberg Television:

On who is to blame for the financial crisis:
“My number one concern is that there has been a complete utter total abdication of personal responsibility though out our entire society. I don’t think anyone anywhere is taking blame themselves for what they did to contribute to the crisis. And again I think it gets back to that blame game. It is the most damaging thing we can do as a country is to blame a narrow set and not look within ourselves for what each of us did or didn’t do to the basic wrong that led to this mess.”

“From the borrower to the average broker all the way to the federal reserve through Congress, the President, several Presidents, I think that this has been coming for awhile and there has been a lessening of the credit standards over a period of time that ultimately led to the kind of blow off top that we have.”

On the current housing market:
“It’s an artificial market. There are a tremendous number of homes where the home homeowner, I think it’s between 2.5 to 3 million homes, where the home homeowner are more than 9 months past due and are not giving notices that they are past due and they’re just living there for free. I actually know one that has been there for a few years without having to pay anything. I think that Fannie and Freddie are basically being used as special purpose vehicles by our government to support the housing market. The private mortgage market is practically nonexistent; 96-97% of mortgages are flowing through Fannie and Freddie now. I think Fannie and Freddie are exercising a tremendous amount of power over the market by withholding properties from sale and not forcing foreclosure, the foreclosure process. I think that it would be best for the government just completely got out of the mortgage market and let the housing, because home prices are a function of income the leverage applied.

On what he is investing in agriculture, real estate and gold:
“I believe that agricultural land, productive agricultural land with water on site, will be very valuable in the future. And I’ve put a good amount of money into that. So I’m investing in alternative investments as well as stocks.”

“I think there is some value in real estate. You have to buy it right. It’s not in general, that’s the problem. I think that there are an awful lot of people out there looking to buy these distressed properties out there and so you need to find special situations. That is how I’ve invested from the beginning. I’m looking for these special situations, these unique ideas and that’s true in real estate too.”

“In my situation I’d rather go long on housing itself, real estate itself. Depending on how you structure it, in the real market, in the physical market, you can get some pretty good deals and I’ve done some of that too.”

“Paulson is big in gold and that is something is interesting to me and given how I see the world playing out. Other than that, I’m just saying, other than gold I haven’t really bought into the other

On the danger of having more power for the Federal Reserve:
“Well, I don’t feel that the economic theories and policies that got us into this mess are the same policies and theories that will get us out of this mess.  And more to the point, I don’t — I’m 100 percent sure that the policies and theories that got us into this mess won’t prevent the next mess from happening.

And that’s probably my biggest frustration with the whole process.  I don’t think that — I think with all the blame on Wall Street and all the focus on Wall Street — the increase — the perp walks for Wall Street — these things, in a lot of ways, are non — are not very productive.  I think it’s not very productive to blame a narrow set of individuals or a narrow set of institutions.

Nobody is taking time to blame anything that anybody in Congress did or the Fed did or the other businesses, you know, how the banks acted, how the mortgage brokers acted, how people acted, how borrowers acted.  There’s — there’s a lot of blame to go around.  And I think this blame game being oriented entirely toward Wall Street is — is not overall helpful.

On Goldman Sachs shutting down its proprietary trading business:
“I think that brokers should not trade for their own account in securities — and securities that are also available to their clients.  I just don’t think that’s pa — that should be done.  I think broking should be pretty boring — safe, boring, low return business.  And I think the same is true for banks.  They should be very safe, solid, indestructible businesses.  And so there are — some of these seemingly Draconian measures, I think, do need to be taken.”

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