The Big Short: Inside the Doomsday Machine

by Michael Lewis

The details were complicated, but the gist of this new money machine was not: It turned a lot of dicey loans into a pile of bonds, most of which were triple-A-rated, then it took the lowest-rated of the remaining bonds and turned most of those into triple-A CDOs. And then—because it could not extend home loans fast enough to create a sufficient number of lower-rated bonds—it used credit default swaps to replicate the very worst of the existing bonds, many times over. Goldman Sachs stood between Michael Burry and AIG. Michael Burry forked out 250 basis points (2.5 percent) to own credit default swaps on the very crappiest triple-B bonds, and AIG paid a mere 12 basis points (0.12 percent) to sell credit default swaps on those very same bonds, filtered through a synthetic CDO, and pronounced triple-A-rated. There were a few other messy detailsfn4—some of the lead was sold off directly to German investors in Düsseldorf—but when the dust settled, Goldman Sachs had taken roughly 2 percent off the top, risk-free,