The paper "Betting on The Blind Side by Michael Lewis" is a delightful example of an article on finance and accounting. In the article, Michael Lewis talks about a younger investor, Michael Burry because of his blindness, viewed the world in a different manner. In 2004, Michael Burry decided to invest in a huge bubble and subprime mortgage bond market when the market threatened to collapse. The hedge fund and stock market manager did not reveal to anyone why he decided to invest in bond markets but instead sat in his office and read the article and financial filings.
His main curiosity was to figure out how the subprime mortgage bonds function. Investors from the top floor received low ratings than those from the bottom floor because they were taking on more risks. Investors who sought to purchase mortgage bonds had to decide which floor of the tower they wanted to invest. However, Burry, on the other hand, was not after buying mortgage bonds but rather sought out how he could bet against subprime mortgage bonds. Using information from the available prospectus, each mortgage bond had its own little corporation. However, despite this, Burry despite much of his time scanning through these prospectuses with the hope that he could get what he needed to understand about the subprime mortgage bond.
In 2004, there was a decline in lending standards. Burry did not view these standards as a decline but for him, they had just hit the bottom. According to Lewis, the bottom was referred to as the interest-only negative amortizing rate subprime mortgage whereby the home purchaser was offered an opportunity of paying nothing and was allowed to roll whatever interest you owed the bank into a high balance.
Burry was amazed why such an individual who lent money would desire to extend such a loan. The problem that Burry had was the various tranches of subprime mortgage bonds in which these bonds were impossible to sell short since to sell a stock short, you needed to borrow it, which were not easy to find. An investor would buy or not buy them but could not bet explicitly against them because the subprime mortgage market had a place for investors who took a shallow view of them.
This is based on the idea that the entire subprime mortgage market was doomed and nothing could be done to rescue it. The stock market could increase much longer than Burry could remain solvent. Burry also discovered credit default swap in which began to purchase insurance on companies he thought would suffer from real estate downtown since such as meltdown would force these companies to lose money. Burry realized that the credit default swaps on subprime mortgage bonds were significant in the subprime mortgage market in that they were used for hedging.
In sum, Burry knew that in order to make side bets on subprime mortgage bonds, a credit default swap was needed.