The Big Short_ Inside the Doomsday Machine - Michael Lewis [128]
* Dear Reader: If you have followed the story this far, you deserve not only a gold star but an answer to a complicated question: If Mike Burry was the only one buying credit default swaps on subprime mortgage bonds, and he bought a billion dollars' worth of them, who took the other $19 billion or so on the short side of the trade with AIG? The answer is, first, Mike Burry soon was joined by others, including Goldman Sachs itself--and so Goldman was in the position of selling bonds to its customers created by its own traders, so they might bet against them. Secondly, there was a crude, messy, slow, but acceptable substitute for Mike Burry's credit default swaps: the actual cash bonds. According to a former Goldman derivatives trader, Goldman would buy the triple-A tranche of some CDO, pair it off with the credit default swaps AIG sold Goldman that insured the tranche (at a cost well below the yield on the tranche), declare the entire package risk-free, and hold it off its balance sheet. Of course, the whole thing wasn't risk-free: If AIG went bust, the insurance was worthless, and Goldman could lose everything. Today Goldman Sachs is, to put it mildly, unhelpful when asked to explain exactly what it did, and this lack of transparency extends to its own shareholders. "If a team of forensic accountants went over Goldman's books, they'd be shocked at just how good Goldman is at hiding things," says one former AIG FP employee, who helped to unravel the mess, and who was intimate with his Goldman counterparts.
* Zelman alienated her Wall Street employer with her pessimism, and finally quit and set up her own consulting firm. "It wasn't that hard in hindsight to see it," she says. "It was very hard to know when it would stop." Zelman spoke occasionally with Eisman, and always left these conversations feeling better about her views, and worse about the world. "You needed the occasional assurance that you weren't nuts," she says.
* Confusingly, subprime mortgage bonds are classified not as mortgage bonds but, along with bonds backed by credit card loans, auto loans, and other, wackier collateral, as "asset-backed securities."
* Even now, after the death of Lehman Brothers, LehmanLive remains the ghostly go-to source for the contents of many CDOs.
* When the market cracked, Devaney went bust and was forced to sell his yacht, his plane, and his Renoir (for a nice profit) and defend himself against several nasty newspaper articles. "It takes an honest individual to admit that he was wrong," he wrote, in one of several rambling letters released over the PR Newswire. "I was long in 2007 and was wrong."
"He was incredibly cynical about the market," said Charlie. "And he lost money. I never figured that out."
* Two years later, Las Vegas would lead the nation in its rate of home foreclosures.
* In Las Vegas they also met with David Wells, who ran subprime lending for a company called Fremont Investment & Loan. Wells also said he expected losses to run 5 percent. In September, nine months later, Fremont would announce that 30 percent of its subprime loans were in default. Its pools of loans would register losses higher than 40 percent--which is to say that, even after it sold the houses it foreclosed upon, it was out nearly half the money it loaned.
* The "spread" on any bond is simply the difference between the interest rate it pays to the investor, and some putatively risk-free rate--say, the rate paid to investors in U.S. Treasury bonds.
* A brief reminder: In thinking about these towers of debt, it's handy to simplify them into three floors: a basement, called the "equity," which takes the very first losses and is not an investment-grade security; the lower floor, called the "mezzanine," with triple-B rating; and the upper floor, with triple-A rating, and generally referred to as the "senior." In practice, the towers were far more finely sliced: a CDO might have fifteen