Financier Michael Burry became a household name after the 2015 film The Big Short, which chronicled his bet on the subprime bust that sparked the 2008 financial crisis.
What most people tend to forget is that on the other side of Burry’s CDO bet was Goldman Sachs in particular (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” by Michael Lewis, it is said that Bury decided to bet on the implosion of the subprime market after noticing that many people could not actually afford to pay their mortgages. But lenders were finding new financial instruments to justify providing new money.
“It was a clear sign that lenders had lost it, constantly lowering their own standards to increase loan volumes,” Bury said.
Lenders sold those loans to Goldman Sachs, Morgan Stanley and Wells Fargo and other too-big-to-fail banks, which packaged them into bonds and sold them off. These practices nearly brought the financial system to its knees. They caused the worst financial crisis since 1929.
On the brink of bankruptcy in September 2008, insurer AIG received $182 billion from American taxpayers through the US government. The insurer then paid out much of that money to the big banks. Goldman Sachs received $12.9 billion from the bailout, according to The Report of the Financial Crisis Inquiry Commission (FCIC). in the financial crash of 2008. The move drew criticism.
Goldman Sachs has a borrower problem
The federal government argued that if AIG had failed, it would have had a domino effect, in other words a series of massive collapses. However, this did not save Lehman Brothers.
According to Bury, Wall Street banks should have learned the lessons of this crisis, considered the most serious since the Great Depression.
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This explains his surprise at the reading of a CNBC article explaining that Goldman Sachs’ loss rate in its consumer credit card lending business is the highest among US card issuers.
Official figures from Goldman Sachs show that the most vulnerable consumers are no longer able to meet their payment deadlines. “Goldman’s credit card loan loss rate hit 2.93% in the second quarter. That’s the worst among major U.S. card issuers and “well above mortgage lenders,” the report said, citing a recent research note from JPMorgan.
Goldman Sachs originated roughly 28.3% ($3.35 billion) of $11.84 billion in consumer card loans to individuals with FICO credit scores below 660, according to regulatory documents.
FICO stands for Fair Isaac Corporation, which measures a borrower’s creditworthiness by considering factors such as payment and credit history. According to Credit karma.
Therefore, the profile of more than a quarter of Goldman Sachs cardholders resembles that of issuers known for their high-risk offerings.
“Goldman continues to meddle,” Bury said on Twitter on September 12. “AIG was bailed out to save Goldman from the other ‘subprime’ problem that everyone swore would not be ‘contaminated.’
He added that: “Goldman’s Apple Card? More than a quarter for mortgage borrowers. 3% loss of this business to Q2.”
Goldman Sachs did not respond to a request for comment.
This is not the first time Bury has taken on Goldman Sachs. He has been criticizing the bank for several years.