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By Root 387 0

just know it. When you sit down with Richard Posner [the legal scholar], you know it's Richard Posner. When you sit down with the ratings agencies you know it's the ratings agencies." To judge from their behavior, all the rating agencies worried about was maximizing the number of deals they rated for Wall Street investment banks, and the fees they collected from them. Moody's, once a private company, had gone public in 2000. Since then its revenues had boomed, from $800 million in 2001 to $2.03 billion in 2006. Some huge percentage of the increase--more than half, certainly, but exactly how much more than half they declined to tell Eisman--flowed from the arcane end of the home finance sector, known as structured finance. The surest way to attract structured finance business was to accept the assumptions of the structured finance industry. "We asked everyone the same two questions," said Vinny. "What is your assumption about home prices, and what is your assumption about loan losses." Both rating agencies said they expected home prices to rise and loan losses to be around 5 percent--which, if true, meant that even the lowest-rated, triple-B, subprime mortgage bonds crafted from them were money-good. "It was like everyone had agreed in advance that five percent was the number," said Eisman. "They all said five percent. It was a party and there was a party line."* What shocked Eisman was that none of the people he met in Las Vegas seemed to have wrestled with anything. They were doing what they were doing without thinking very much about it.

It was in Las Vegas that Eisman and his associates' attitude toward the U.S. bond market hardened into something like its final shape. As Vinny put it, "That was the moment when we said, 'Holy shit, this isn't just credit. This is a fictitious Ponzi scheme.'" In Vegas the question lingering at the back of their minds ceased to be, Do these bond market people know something we do not? It was replaced by, Do they deserve merely to be fired, or should they be put in jail? Are they delusional, or do they know what they're doing? Danny thought that the vast majority of the people in the industry were blinded by their interests and failed to see the risks they had created. Vinny, always darker, said, "There were more morons than crooks, but the crooks were higher up." The rating agencies were about as low as you could go and still be in the industry, and the people who worked for them really did not seem to know just how badly they had been gamed by big Wall Street firms. Their meeting in Las Vegas with the third and smallest rating agency, Fitch Ratings, stuck in Vinny's mind. "I know you're sort of irrelevant," he'd said to them, as politely as he could. "There are these two big guys everyone pays attention to, and then there is you. If you want to make a statement--and get people to notice you--why don't you go your own way and be the honest one?" He expected the good people of Fitch Ratings service to see the point, and maybe even chuckle nervously. Instead they seemed almost offended. "They went all pure on me," said Vinny. "It was like they didn't understand what I was saying."

They had left for Las Vegas with a short position in subprime mortgage bonds of a bit less than $300 million. Upon their return they raised it to $550 million, with new bets against the CDOs created by Wing Chau. With only $500 million under management, the position now overwhelmed their portfolio. They didn't stop there, however. Their first day back in the office, they shorted the stock of Moody's Corporation, at $73.25 a share, then went searching for other companies and other people, like Wing Chau, on the other side of their trade.

CHAPTER SEVEN

The Great Treasure Hunt

Charlie Ledley and Ben Hockett returned from Las Vegas on January 30, 2007, convinced that the entire financial system had lost its mind. "I said to my mother, 'I think we might be facing something like the end of democratic capitalism,'" said Charlie. "She just said, 'Oh, Charlie,' and seriously suggested I go on lithium." They