That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”
Pardon the language, that is how it is printed. Read it ... and weep.
The final results of this global charade have not hit us...yet.
What you post is exquisitely important and germane as it could be.
The Congress et al is focused on the “housing bailout” and “housing prices” and “home foreclosures”.
The fact of the matter is that if the problem was simply the face value of all those stenchy mortgages out there, the problem would have a start and an end that could be loosely quantified. But that is not the case, and that is why this problem has morphed and oozed into so many other sectors of the economy and indeed the world.
The problem is not the face value of the securitization(s) that have fictionalized the world’s financial system; it is the value of the insurance that has been written on the default of all that fictionality. Commonly called CDS = Credit Default Swaps. And I shouldn’t have to give you a more cogent example than AIG, a profitable and well run insurance company that has been turned into a black hole of unfathomable debt from the operations and activities of a 200-employee division in London. The bailout of AIG was almost entirely for the sole purpose of bailing out Goldman Sachs, the insured party on most of these default swaps. Well, at least the part that didn’t go for spa treatments (I know, that’s a satirical cheap shot)