• Choose a category
• All
• Classic-Fiction

If it's such a great idea, why are you giving it away to us?

I'm not giving away anything. The supply is infinite.

Yeah. But why bother even telling us?

I'll charge you getting in and getting out. I need to pay the electric bills.

It's zero-sum. Who's on the other side? Who's the idiot?

Dusseldorf. Stupid Germans. They take rating agencies seriously. They believe in the rules.

Why does Deutsche Bank allow you to trash a market that they sit at the center of?

I don't have any particular allegiance to Deutsche Bank...I just work there.

Bullshit. They pay you. How do we know the people running your CDO machine aren't just using your enthusiasm for shorting your own market to exploit us?

Have you met the people running our CDO machine?

At some point Danny and Vinny dropped even the pretense that they were seeking new information about credit default swaps and subprime mortgage bonds. They were just hoping the guy might slip up in some way that confirmed that he was indeed the lying Wall Street scumbag that they presumed him to be. "We're trying to figure out where we fit into this world," said Vinny. "I don't believe him that he needs us because he has too much of this stuff. So why is he doing this?" Lippmann, for his part, felt like a witness under interrogation: These guys were trying to crack him. A few months later, he'd pitch his idea to Phil Falcone, who ran a giant hedge fund called Harbinger Capital. Falcone would buy billions of dollars in credit default swaps virtually on the spot. Falcone knew one-tenth of what these guys knew about the subprime mortgage market, but Falcone trusted Lippmann and these guys did not. In their final meeting, Vinny finally put the matter bluntly. "Greg," he said. "Don't take this the wrong way. But I'm just trying to figure out how you're going to fuck me."

They never actually finished weighing the soul of Greg Lippmann. Rather, they were interrupted by two pieces of urgent news. The first came in May 2006: Standard & Poor's announced its plans to change the model used to rate subprime mortgage bonds. The model would change July 1, 2006, the announcement said, but all the subprime bonds issued before that date would be rated by the old, presumably less rigorous, model. Instantly, the creation of subprime bonds shot up dramatically. "They were stuffing the channel," said Vinny. "Getting as much shit out so that it could be rated by the old model." The fear of new and better ratings suggested that even the big Wall Street firms knew that the bonds they'd been creating had been overrated.

The other piece of news concerned home prices. Eisman spoke often to a housing market analyst at Credit Suisse named Ivy Zelman. The simple measure of sanity in housing prices, Zelman argued, was the ratio of median home price to income. Historically, in the United States, it ran around 3:1; by late 2004, it had risen nationally, to 4:1. "All these people were saying it was nearly as high in some other countries," says Zelman. "But the problem wasn't just that it was four to one. In Los Angeles it was ten to one and in Miami, eight-point-five to one. And then you coupled that with the buyers. They weren't real buyers. They were speculators."* The number of For Sale signs began rising in mid-2005 and never stopped. In the summer of 2006, the Case-Shiller index of house prices peaked, and house prices across the country began to fall. For the entire year they would fall, nationally, by 2 percent.

Either piece of news--rising ratings standards or falling house prices--should have disrupted the subprime bond market and caused the price of insuring the bonds to rise. Instead, the price of insuring the bonds fell. Insurance on the crappiest triple-B tranche of a subprime mortgage bond now cost less than 2 percent a year. "We finally just did a trade with Lippmann," says Eisman. "Then we tried to figure out what we'd done."

The minute they'd done their first trade, they joined Greg Lippmann's long and growing e-mail list. Right