Thursday, November 13, 2008

The engine of doom

And we all thought it would be a nuclear catastrophe, or some horrible virus, or something unimaginable, but not this:
Later, when I sit down with Eisman, the very first thing he wants to explain is the importance of the mezzanine C.D.O. What you notice first about Eisman is his lips. He holds them pursed, waiting to speak. The second thing you notice is his short, light hair, cropped in a manner that suggests he cut it himself while thinking about something else. “You have to understand this,” he says. “This was the engine of doom.” Then he draws a picture of several towers of debt. The first tower is made of the original subprime loans that had been piled together. At the top of this tower is the AAA tranche, just below it the AA tranche, and so on down to the riskiest, the BBB tranche—the bonds Eisman had shorted. But Wall Street had used these BBB tranches—the worst of the worst—to build yet another tower of bonds: a “particularly egregious” C.D.O. The reason they did this was that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce most of them AAA. These bonds could then be sold to investors—pension funds, insurance companies—who were allowed to invest only in highly rated securities. “I cannot fucking believe this is allowed—I must have said that a thousand times in the past two years,” Eisman says.

His dinner companion in Las Vegas ran a fund of about $15 billion and managed C.D.O.’s backed by the BBB tranche of a mortgage bond, or as Eisman puts it, “the equivalent of three levels of dog shit lower than the original bonds.”
That's from a long article by Michael Lewis, "The End". There's too much there to effectively summarize, so read the whole thing. Just remember that the people (Paulson, Bernanke, Pelosi, Reid, et. al.) who are now throwing government money at this 'engine of doom' are only concerned that they and their buddies get out of Dodge. The local governments, pension funds, retirees, etc. that are left are going have to be content with nothing but a big pile of poop.
(h/t Limited, Inc.)


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