Michael Burry is certainly no slouch when it comes to investing. He achieved fame for essentially shorting the housing market -- to great profit -- ahead of the Great Recession, a feat later profiled in the hit movie The Big Short, in which he was portrayed by Christian Bale.

Recently, Burry made $270 million on his investment in GameStop, but the struggling retailer is not the only new target he has been focused on. His firm, Scion Asset Management, just revealed that it made investments last quarter in megabanks Citigroup (C -0.32%) and Wells Fargo (WFC -0.56%). Could he be on to something again?

What's up with Citigroup?

In the fourth quarter, Scion bought nearly $33.3 million in call options on Citigroup, making them the largest position in its portfolio. Like most players in the banking sector, Citigroup struggled in 2020 due to the ultra-low interest rates and higher credit costs resulting from the pandemic.

But Citigroup suffered from its own set of company-specific problems as well. Regulators slapped it with a $400 million consent order due to its failure to correct long-standing deficiencies with its internal controls related to governance, data, and risk management. Those issues were on full display when the bank accidentally wired $900 million to parties who were not due to receive those funds. The bank's still trying to get back $500 million of those funds, but a judge recently ruled that the recipients don't have to return the money.

Picture of building with the word bank on it.

Image source: Getty Images.

The combination of all these issues helped push the bank's market cap well below its tangible book value, presenting a rare buying opportunity for those who still see its long-term promise. Despite the hiccups, Citigroup stock looks pretty good at these levels. Its regulatory issues are not minor, but the bank is already investing billions of dollars into correcting them, which should ultimately improve its operations. Citigroup also has a new CEO and is planning to head in a new strategic direction.

And despite the pandemic, Citigroup still generated an $11.4 billion profit in 2020. More economic stimulus is likely on the way from Washington, and the economic forecast is much better now than it was just a few months ago. In the fourth quarter, Burry had the opportunity to buy call options on shares at prices ranging from a low of $41 per share to a high of $61.66. With shares currently trading above $65 per share, Burry is likely headed in the right direction on those call options.

The path back for Wells Fargo

Burry bought 250,000 shares of Wells Fargo valued at more than $7.5 million last quarter. This beleaguered bank has been struggling ever since its phony-accounts scandal came to light in 2016: For years, bank employees had opened millions of unauthorized accounts on behalf of customers. But the onset of the pandemic sent Wells Fargo stock into a tailspin. It cratered to $21 per share at one point last year. 

Since then, though, the stock has been on the mend. CEO Charlie Scharf has pledged to ramp up Wells Fargo's investment banking division and also cut billions in annual expenses, work that is currently underway. But one of the best recent pieces of news for the bank was that the Federal Reserve had approved its plans to overhaul its risk-management and governance structure.

After the phony-accounts scandal, the Federal Reserve placed a $1.95 trillion asset cap on the bank. It's fairly close to that size already, so this has prevented it from significantly growing its balance sheet. The cap has been in place for three years and is considered one of the costliest bank punishments ever. The approval of the overhaul plan is a critical step on its road to getting the asset cap removed.

Shares of Wells Fargo traded as low as roughly $21 per share and as high as around $30 per share last quarter. In the days since the Fed approved its overhaul plan, shares have popped to more than $37.

Wells Fargo traded above $50 per share at the start of 2020 and the bank still has a lot of work to do to get the cap removed, so Burry's investment likely has much more upside.