The Big Short_ Inside the Doomsday Machine - Michael Lewis [114]
By Thursday, September 18, 2008, however, the big picture had grown so unstable that the small picture had become nearly incoherent to him. On Monday, Lehman Brothers had filed for bankruptcy, and Merrill Lynch, having announced $55.2 billion in losses on subprime bond-backed CDOs, had sold itself to Bank of America. The U.S. stock market had fallen by more than it had since the first day of trading after the attack on the World Trade Center. On Tuesday the U.S. Federal Reserve announced that it had lent $85 billion to the insurance company AIG, to pay off the losses on the subprime credit default swaps AIG had sold to Wall Street banks--the biggest of which was the $13.9 billion AIG owed to Goldman Sachs. When you added in the $8.4 billion in cash AIG had already forked over to Goldman in collateral, you saw that Goldman had transferred more than $20 billion in subprime mortgage bond risk into the insurance company, which was in one way or another being covered by the U.S. taxpayer. That fact alone was enough to make everyone wonder at once how much more of this stuff was out there, and who owned it.
The Fed and the Treasury were doing their best to calm investors, but on Wednesday no one was obviously calm. A money market fund called the Reserve Primary Fund announced that it had lost enough on short-term loans to Lehman Brothers that its investors were not likely to get all their money back, and froze redemptions. Money markets weren't cash--they paid interest, and thus bore risk--but, until that moment, people thought of them as cash. You couldn't even trust your own cash. All over the world corporations began to yank their money out of money market funds, and short-term interest rates spiked as they had never before spiked. The Dow Jones Industrial Average had fallen 449 points, to its lowest level in four years, and most of the market-moving news was coming not from the private sector but from government officials. At 6:50 on Thursday morning, when Danny arrived, he learned that the chief British financial regulator was considering banning short selling--an act that, among other things, would put the hedge fund industry out of business--but that didn't begin to explain what now happened. "All hell was breaking loose in a way I had never seen in my career," said Danny.
FrontPoint was positioned perfectly for exactly this moment. By agreement with their investors, their fund could be 25 percent net short or 50 percent net long the stock market, and the gross positions could never exceed 200 percent. For example, for every $100 million they had to invest, they could be net short $25 million, or net long $50 million--and all of their bets combined could never exceed $200 million. There was nothing in the agreement about credit default swaps, but that no longer mattered. ("We never figured out how to put it in," said Eisman.) They'd sold their last one back to Greg Lippmann two months earlier, in early July. They were now back to being, exclusively, stock market investors.
At that moment they were short nearly as much as they were allowed to be short, and all of their bets were against banks, the very companies collapsing the fastest: Minutes after the market opened they were up $10 million. The shorts were falling, the longs--mainly smaller banks removed from the subprime market--were falling less. Danny should have been elated: Everything they had thought might happen was now happening. He wasn't elated, however; he was anxious. At 10:30, an hour into trading, every financial stock went into a free fall, whether it deserved to or not. "All this information goes through me," he said. "I'm supposed to know how to transmit information. Prices were moving so quickly I couldn't get a fix. It felt like a black