Financier Michael Burry became a household name after the 2015 film "The Big Short" which depicted his bet on the subprime-mortgage meltdown that sparked the 2008 financial crisis.
What most people tend to forget is that on the other side of the the mortgage collateralized debt obligations (CDOs)' bet made by Burry there was notably Goldman Sachs (GS). CDOs are loans, mortgages and other assets that investment banks package and offer to institutional investors
In the book "The Big Short: Inside the Doomsday Machine" from Michael Lewis, it's said that Burry decided to bet on the implosion of the subprime market after he noticed that a lot of people couldn’t actually afford to pay their mortgages. But lenders were finding new financial instruments to justify handing them new money.
"It was a clear sign that lenders had lost it, constantly degrading their own standards to grow loan volumes,” Burry said.
Lenders were selling these loans to Goldman Sachs and Morgan Stanley and Wells Fargo and other too big to fail banks, which packaged them into bonds and sold them off. These practices almost brought the financial system to its knees. They caused the worst financial crisis since 1929.
On the verge of bankruptcy in September 2008, the insurer AIG received $182 billion from American taxpayers via the U.S. government. The insurer then paid a large part of this money to the big banks. Goldman Sachs received $12.9 billion of the bailout funds, according to the Financial Crisis Inquiry Commission (FCIC) report into 2008's financial meltdown. The move drew criticism.
Goldman Sachs Has a Problem with Borrowers
The federal government had argued that if AIG had fallen it would have had a domino effect, in other words massive collapses in series. It didn't however save Lehman Brothers.
For Burry, Wall Street's banks should have learned the lessons of this crisis seen as the most serious since the Great Depression.
This explains his surprise at reading a CNBC article explaining that Goldman Sachs' loss rate in the credit card consumer lending business was the highest among US card issuers.
Official data at Goldman Sachs shows that the most vulnerable consumers are no longer able to meet their payment deadlines. "Goldman’s loss rate on credit card loans hit 2.93% in the second quarter. That’s the worst among big U.S. card issuers and “well above subprime lenders," the report said, quoting a recent research note from JPMorgan.
Goldman Sachs granted approximately 28.3% ($3.35 billion) of the $11.84 billion in consumer card loans to individuals with a FICO credit score below 660, according to regulatory filings.
FICO stands for Fair Isaac Corporation which measures a borrower’s creditworthiness by considering factors such as payment and credit history. People with a 660 credit score or below may find it difficult to get approved for credit without high fees and interest rates, according to Credit Karma.
Consequently, the profile of more than a quarter of Goldman Sachs cardholders thus resembles that of of issuers known for their subprime offerings.
"Goldman keeps stepping in it," Burry said on Twitter on Sept. 12. "AIG was rescued to save Goldman from the other 'subprime' issue that everyone swore would not be 'contagious."
He added that: "Goldman's Apple Card? More than a quarter to subprime borrowers. 3% loss rate on that business as of Q2."
Goldman Sachs did not respond to a request for comment.
This isn't the first time Burry has taken on Goldman Sachs. He has been criticizing the bank for several years now.
