Uncomfortable dealing with patients, Burry quit medicine and started a hedge fund in Cupertino, Calif., spending most of his time in a darkened office glued to his computer screen.
Beginning in 2003, he turned to something that no one else in America was doing: reading and analyzing the pools of risky subprime mortgage loans that Wall Street had been buying up and bundling into highly profitable mortgage backed securities, which they were selling to investors around the world.
"I called up the prospectuses and I read the prospectuses and I looked at these pools. I could see the credit standards within these pools deteriorating just quarter to quarter," Burry said.
Asked how he could tell, Burry told Kroft, "There was essentially crappier mortgages being put into these pools. And it didn't seem investors seemed to care and it didn't seem the ratings agencies seemed to care."
Asked if he thinks many people read these prospectuses, Burry said, "I think the lawyers that put them together to an extent maybe."
"Do you think that the executives at the big investment houses who were issuing these bonds had read them? Or understood them?" Kroft asked.
"No, they didn't read them," Burry replied. "I think that there were probably junior analysts that were given the tasks of reviewing these documents. However, I think that this was a profit center. It was a profit center. It was something the organization wanted to do."
In effect, Lewis writes, Burry was doing the first real analysis of the creditworthiness of the subprime borrowers and the structure of the complicated Wall Street mortgage securities; the kind of work that was supposed to have been done by bond rating agencies like Standard & Poor's and Moody's, so that investors could accurately judge their risks.
"What you were doing sounds to me like the job that the rating agency should have been doing," Kroft remarked.
"There's no way the rating agencies had anywhere the manpower to look through all that was being issued," Burry said.
"Yeah, but, you're one guy!" Kroft pointed out. "And you found it."
"You would think that even if they just looked at a sample maybe they would have come to a realization," Burry said.
By 2005, Burry had come to the realization that the Wall Street bond market had lost its mind. It was buying up hundreds of millions of dollars in dicey loans to unqualified buyers who were, in Michael Lewis' words, "one broken refrigerator away from default." Burry concluded that the subprime market would collapse in 2007.
"He notices for the first time that there are pools, there are mortgage bonds supported by pools of loans, and most of the loans are, what you call negative amortizing interest only loans. Which means that, you, the homeowner, and buyer, you borrow the money, and you not only don't have to repay your principal, you don't even have to repay the interest. And if you just don't pay anything, they just add to your loan," Lewis explained.
"You can't lose your house, in theory, right?" he added. "They're scraping the bottom of the barrel. Now is the time to lay a bet. And it's before anybody does."