“Hell Is Coming”: How Bill Ackman Predicted the COVID Market Crash—And Made a Fortune

But even in late February, something strange had happened. The sellers of these financial insurance policies weren’t distinguishing between riskier borrowers and safer ones, charging barely any more for swaps on lower-rated debt. “The market is completely mispricing this,” Ackman told his team on that Sunday conference call. “Start buying.”

Though he didn’t use the word, Ackman was calling the financial market what it had clearly become: a bubble, and one that was at risk of popping. 

In the 1600s, merchants in Amsterdam went crazy over tulip bulbs. Four hundred years later, it was Japanese real estate, dot-com companies, and suburban homes. Some bubbles are obviously ludicrous even in the moment (see: Beanie Babies) and some only in retrospect, but the pattern is reliably the same: Evangelists pile in. Other investors, seized by a fear of missing out on big gains, follow on. Frenzied buying pushes an asset’s price well beyond what a sober economic analysis can support. Skeptics grumble while everyone gets rich. 

In the decade heading into 2020, the same thing had happened. Except instead of being concentrated in one place, it came for nearly the whole of the global financial system. It was an everything bubble. 

The S&P 500 gained 400 percent between March 2009 and March 2020 in an historic bull market. Debt got cheap and plentiful. The oddity that Ackman had noticed—a lack of discernment among bond investors who charged barely more interest to riskier borrowers than safer ones—grew more pronounced. Near-zero interest rates set by the Federal Reserve forced investors to invest in anything that might return a little profit, pushing them further and further into riskier territory. The ten-year economic expansion had made investors blind to risk, forgetful that markets can go down just as easily as up. 

Conventional wisdom says no economic trend has a single cause, but the decade-long bull market that grew out of the wreckage of the 2008 meltdown may come as close as anything to proving that wrong. The Federal Reserve had kept interest rates near zero in the years after the global financial crisis. That forced investors to look for alternatives. They pile into stocks, corporate bonds, real estate, and anything else that promises a return. So everything goes up. 

Skeptics were converted, grumbling. By the decade’s final years, FOMO had replaced fundamentals as the dominant force in financial markets. It was a bubble—not as patently absurd as the rush for Beanie Babies or Dutch tulips, but a bubble nonetheless—and the only question was what would burst it. 

Ackman was waiting, holding out a bucket. 

The coronavirus represented something investors hadn’t seen in more than a decade: a shock whose impact was potentially huge and essentially unknowable. On February 27, the stock market posted its biggest one-day point drop in history. The S&P 50 was now down 12 percent from its highs just a few weeks earlier, officially in what economists call  “correction” territory. Of the twenty-six previous market slides of similar size in history, the average had taken four months. This one took just six days.

He emailed Warren Buffett, whose stock Ackman had flirted with selling just a few days earlier. Berkshire’s annual shareholder meeting, known in the press as “Woodstock for capitalists,” drew tens of thousands of people each spring to Nebraska. 

The billionaire was as folksy as ever in his reply. In an email dictated to his longtime secretary—the octogenarian doesn’t use email—he said that he hoped to see Ackman at this year’s meeting, set for May 2, and invited the investor and Oxman to a private brunch. “Unfortunately we can’t include Raika,” he said of Ackman’s infant daughter, “though if she owns Berkshire, I hope she continues to vote for me and Charlie” as members of the board of directors. He added: “I have no idea if the coronavirus will affect attendance, but Charlie and I plan on having a great time.” 

Starting to feel somewhat foolish, Ackman tried another of the world’s richest men. “I believe I have an accurate and differentiated view of the economic impact of coronavirus, if you’re interested in comparing notes,” read the email that he typed out to Bill Gates on the afternoon of February 28. The Microsoft founder had authored an op-ed piece the day before in which he said the coronavirus was starting to look “like the once-in-a-century pathogen we’ve been worried about.” 

He never heard back. 

By early March, Pershing Square had bought more than $1 billion of credit-default swaps on broad baskets of bonds. The position cost $27 million, which Ackman thought was the bargain of a lifetime. 

Although credit-default swaps are often likened to financial insurance policies, they are different in one key regard: The event they protect against—a borrower defaulting on its debt—doesn’t actually have to happen for the policyholder to make money. The swaps themselves are financial investments that gain in paper value as the event they guard against appears more likely. All it would take for Pershing Square’s bet to pay off was for the market to get spooked. 

And as the coronavirus spread across Asia and then into the United States, global investors got scared in a hurry. From a high in early March, the benchmark index of corporate bonds fell 15 percent by March 20. On paper, Pershing Square’s investment was worth more than $2 billion. It was as if he had bought flood insurance during a drought year for a pittance and sold it during a monsoon. 

By the time his traders liquidated the position three days later, Ackman had netted $2.6 billion in profits, a hundred-thousand-fold return, in the span of three weeks.