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And therein lay a new problem: Bear Stearns had sold Cornwall 70 percent of its credit default swaps. Because Bear Stearns was big and important, and Cornwall Capital was a garage band hedge fund, Bear Stearns hadn't been required to post collateral to Cornwall. Cornwall was now totally exposed to the possibility that Bear Stearns would be unable to pay off its gambling debts. Cornwall Capital couldn't help but notice that Bear Stearns was not so much shaping the subprime mortgage bond business as being reshaped by it. "They'd turned themselves from a low-risk brokerage operation into a subprime mortgage engine," said Jamie. If the subprime mortgage market crashed, Bear Stearns was going to crash with it.

Back in March, Cornwall had bought $105 million in credit default swaps on Bear Stearns--that is, they'd made a bet on the collapse of Bear Stearns--from the British bank HSBC. If Bear Stearns failed, HSBC would owe them $105 million. Of course this only shifted their risk to HSBC. HSBC was the third largest bank in the world, and one of those places it was hard to think about going down. On February 8, 2007, however, HSBC rocked the market with the announcement that it was taking a big, surprising loss on its portfolio of subprime mortgage loans. It had entered the U.S. subprime lending business in 2003, when it had bought America's biggest consumer lending operation, Household Finance. The same Household Finance that had pushed Steve Eisman over the narrow border between Wall Street skeptic and Wall Street cynic.

From the social point of view the slow and possibly fraudulent unraveling of a multi-trillion-dollar U.S. bond market was a catastrophe. From the hedge fund trading point of view it was the opportunity of a lifetime. Steve Eisman had started out running a $60 million equity fund but was now short around 600 million dollars' worth of various subprime-related securities, and he wanted to short more. "Sometimes his ideas cannot be manifested in a trade," said Vinny. "This time they could." Eisman was enchained, however, by FrontPoint Partners and, by extension, Morgan Stanley. As FrontPoint's head trader, Danny Moses found himself caught in the middle, between Eisman and FrontPoint's risk management people, who didn't seem to completely understand what they were doing. "They'd call me and say, 'Can you get Steve to take some of this off?' I'd go to Steve and Steve would say, 'Just tell them to fuck off.' And I'd say, 'Fuck off.'" But risk management hounded them, and cramped Eisman's style. "If risk had said to us, 'We're very comfortable with this and you can do ten times this amount,'" said Danny, "Steve would have done ten times the amount." Greg Lippmann was now blasting Vinny and Danny with all sorts of negative information about the housing market, and, for the first time, Vinny and Danny began to hide the information from Eisman. "We were worried he'd come out of his office and shout, 'Do a trillion!'" said Danny.

In the spring of 2007, the subprime mortgage bond market, incredibly, had strengthened a bit. "The impact on the broader economy and the financial markets of the problems in the subprime markets seems likely to be contained," U.S. Federal Reserve chairman Ben Bernanke was quoted as saying in the newspapers on March 7. "Credit quality always gets better in March and April," said Eisman. "And the reason it always gets better in March and April is that people get their tax refunds. You would think people in the securitization world would know this. And they sort of did. But they let the credit spreads tighten. We just thought that was moronic. What are you, fucking stupid?" Amazingly, the stock market continued to soar, and the television over the FrontPoint trading desks emitted a ceaselessly bullish signal. "We turned off CNBC," said Danny Moses. "It became very frustrating that they weren't in touch with reality anymore. If something negative happened, they'd spin it positive. If something positive happened, they'd blow it out of proportion. It alters your mind. You can't be clouded