In his quarterly letters he coined a phrase to describe what he thought was happening: вЂњthe extension of credit by instrument.вЂќ That is, a lot of people couldnвЂ™t actually afford to pay their mortgages the old-fashioned way, and so the lenders were dreaming up new financial instruments to justify handing them new money. Burry disliked talking to people face-to-face and thought of these letters as the single most important thing he did to let his investors know what he was up to. Inside the subprime-mortgage market there was now a similar neighborhood known as вЂњmidprime.вЂќДЄ lot of hedge-fund managers spent time chitchatting with their investors and treated their quarterly letters to them as a formality. Inside Oakland there was a neighborhood, masquerading as an entirely separate town, called вЂњRockridge.вЂќ Simply by refusing to be called вЂњOakland,вЂќ вЂњRockridgeвЂќ enjoyed higher property values. Some crafty bond-market person had gazed upon the subprime-mortgage sprawl, as an ambitious real-estate developer might gaze upon Oakland, and found an opportunity to rebrand some of the turf. вЂњMidprimeвЂќ was a kind of triumph of language over truth. All of this could more clearly be called вЂњsubprime loans,вЂќ but the bond market wasnвЂ™t clear. stood for вЂњresidential-mortgage-backed security.вЂќ hel stood for вЂњhome-equity loan.вЂќ heloc stood for вЂњhome-equity line of credit.вЂќ Alt-A was just what they called crappy subprime-mortgage loans for which they hadnвЂ™t even bothered to acquire the proper documents-to, say, verify the borrowerвЂ™s income. It was called an вЂњA.B.S.,вЂќ or вЂњasset-backed security.вЂќ If you asked Deutsche Bank exactly what assets secured an asset-backed security, youвЂ™d be handed lists of more acronyms-R.M.B.S., hels, helocs, Alt-A-along with categories of credit you did not know existed (вЂњmidprimeвЂќ).

A bond backed entirely by subprime mortgages, for example, wasnвЂ™t called a subprime-mortgage bond. The subprime-mortgage market had a special talent for obscuring what needed to be clarified. Burry spent the end of 2004 and early 2005 scanning hundreds and actually reading dozens of the prospectuses, certain he was the only one apart from the lawyers who drafted them to do so-even though you could get them all for $100 a year from. If you read the fine print, you saw that each bond was its own little corporation. He was wondering how he might short, or bet against, subprime-mortgage bonds.Д®very mortgage bond came with its own mind-numbingly tedious 130-page prospectus. Investors who bought mortgage bonds had to decide in which floor of the tower they wanted to invest, but Michael Burry wasnвЂ™t thinking about buying mortgage bonds. Because they were taking on more risk, the investors in the bottom floors received a higher rate of interest than investors in the top floors. The low floors got their money back last, suffered the first losses, and got the lowest ratings from MoodyвЂ™s and S&P. The top floors got their money back first and so got the highest ratings from MoodyвЂ™s and S&P, and the lowest interest rate. A giant number of individual loans got piled up into a tower. He wanted to know, especially, how subprime-mortgage bonds worked. He didnвЂ™t talk to anyone about what became his new obsession he just sat alone in his office, in San Jose, California, and read books and articles and financial filings. He learned all he could about how money got borrowed and lent in America. In early 2004 a 32-year-old stock-market investor and hedge-fund manager, Michael Burry, immersed himself for the first time in the bond market.

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