Free The Big Short: Inside the Doomsday Machine by Michael Lewis Page A

companies looking to short them, generally. I want the upside to be much more than the downside, fundamentally." He also didn't like the idea of taking the risk of selling a stock short, as the risk was, theoretically, unlimited. It could only fall to zero, but it could rise to infinity.
    Investing well was all about being paid the right price for risk. Increasingly, Burry felt that he wasn't. The problem wasn't confined to individual stocks. The Internet bubble had burst, and yet house prices in San Jose, the bubble's epicenter, were still rising. He investigated the stocks of home builders, and then the stocks of companies that insured home mortgages, like PMI. To one of his friends--a big-time East Coast professional investor--he wrote in May 2003 that the real estate bubble was being driven ever higher by the irrational behavior of mortgage lenders who were extending easy credit. "You just have to watch for the level at which even nearly unlimited or unprecedented credit can no longer drive the [housing] market higher," he wrote. "I am extremely bearish, and feel the consequences could very easily be a 50% drop in residential real estate in the U.S.... A large portion of current [housing] demand at current prices would disappear if only people became convinced that prices weren't rising. The collateral damage is likely to be orders of magnitude worse than anyone now considers."

    When he set out to bet against the subprime mortgage bond market, in early 2005, the first big problem that he encountered was that the Wall Street investment banks that might sell him credit default swaps didn't share his sense of urgency. Mike Burry believed he had to place this bet now, before the U.S. housing market woke up and was restored to sanity. "I didn't expect fundamental deterioration in the underlying mortgage pools to hit critical levels for a couple years," he said--when the teaser rates would vanish and monthly payments would skyrocket. But he thought the market inevitably would see what he had seen and adjust. Someone on Wall Street would notice the fantastic increase in the riskiness of subprime mortgages and raise the price of insuring them accordingly. "It's going to blow up before I can get this trade on," he wrote in an e-mail.
    As Burry lived his life by e-mail, he inadvertently kept a record of the birth of a new market from the point of view of its first retail customer. In retrospect, the amazing thing was just how quickly Wall Street firms went from having no idea what Mike Burry was talking about when he called and asked them about credit default swaps on subprime mortgage bonds, to reshaping their business in a way that left the new derivative smack at the center. The original mortgage bond market had come into the world in much the same way, messily, coaxed into existence by the extreme interest of a small handful of people on the margins of high finance. But it had taken years for that market to mature; this new market would be up and running and trading tens of billions of dollars' worth of risk within a few months.
    The first thing Mike Burry needed, if he was going to buy insurance on a big pile of subprime mortgage bonds, was to create some kind of standard, widely agreed-upon contract. Whoever sold him a credit default swap on a subprime mortgage bond would one day owe him a great deal of money. He suspected that dealers might try to get out of paying it to him. A contract would make it harder for them to do that, and easier for him to sell to one dealer what he had bought from another--and thus to shop around for prices. An organization called International Swaps and Derivatives Association (ISDA) had the task of formalizing the terms of new securities. * ISDA already had a set of rules in place to govern credit default swaps on corporate bonds, but insurance on corporate bonds was a relatively simple matter. There was this event, called a default, that either did or did not happen. The company missed an