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the rating agencies' standards--to maximize the percentage of triple-A-rated bonds created from any given pool of loans--the average FICO score of the borrowers in the pool needed to be around 615. There was more than one way to arrive at that average number. And therein lay a huge opportunity. A pool of loans composed of borrowers all of whom had a FICO score of 615 was far less likely to suffer huge losses than a pool of loans composed of borrowers half of whom had FICO scores of 550 and half of whom had FICO scores of 680. A person with a FICO score of 550 was virtually certain to default and should never have been lent money in the first place. But the hole in the rating agencies' models enabled the loan to be made, as long as a borrower with a FICO score of 680 could be found to offset the deadbeat, and keep the average at 615.

Where to find the borrowers with high FICO scores? Here the Wall Street bond trading desks exploited another blind spot in the rating agencies' models. Apparently the agencies didn't grasp the difference between a "thin-file" FICO score and a "thick-file" FICO score. A thin-file FICO score implied, as it sounds, a short credit history. The file was thin because the borrower hadn't done much borrowing. Immigrants who had never failed to repay a debt, because they had never been given a loan, often had surprisingly high thin-file FICO scores. Thus a Jamaican baby nurse or Mexican strawberry picker with an income of $14,000 looking to borrow three-quarters of a million dollars, when filtered through the models at Moody's and S&P, became suddenly more useful, from a credit-rigging point of view. They might actually improve the perceived quality of the pool of loans and increase the percentage that could be declared triple-A. The Mexican harvested strawberries; Wall Street harvested his FICO score.

The models used by the rating agencies were riddled with these sorts of opportunities. The trick was finding them before others did--finding, for example, that both Moody's and S&P favored floating-rate mortgages with low teaser rates over fixed-rate ones. Or that they didn't care if a loan had been made in a booming real estate market or a quiet one. Or that they were seemingly oblivious to the fraud implicit in no-doc loans. Or that they were blind to the presence of "silent seconds"--second mortgages that left the homeowner with no equity in his home and thus no financial incentive not to hand the keys to the bank and walk away from it. Every time some smart Wall Street mortgage bond packager discovered another example of the rating agencies' idiocy or neglect, he had himself an edge in the marketplace: Crappier pools of loans were cheaper to buy than less crappy pools. Barbell-shaped loan pools, with lots of very low and very high FICO scores in them, were a bargain compared to pools clustered around the 615 average--at least until the rest of Wall Street caught on to the hole in the brains of the rating agencies and bid up their prices. Before that happened, the Wall Street firm enjoyed a perverse monopoly. They'd phone up an originator and say, "Don't tell anybody, but if you bring me a pool of loans teeming with high thin-file FICO scores I'll pay you more for it than anyone else." The more egregious the rating agencies' mistakes, the bigger the opportunity for the Wall Street trading desks.

In the late summer of 2006 Eisman and his partners knew none of this. All they knew was that Wall Street investment banks apparently employed people to do nothing but game the rating agencies' models. In a rational market, the bonds backed by pools of weaker loans would have been priced lower than the bonds backed by stronger loans. Subprime mortgage bonds all were priced by the ratings bestowed on them by Moody's. The triple-A tranches all traded at one price, the triple-B tranches all traded at another, even though there were important differences from one triple-B tranche to another. As the bonds were all priced off the Moody's rating, the most overpriced bonds were the bonds that had been most ineptly