The Big Short: Inside the Doomsday Machine

“How do you make poor people feel wealthy when wages are stagnant? You give them cheap loans.”

Home-loan lenders eagerly ply working-class borrowers with easy-to-get mortgages. This is in keeping with policies that encourage home ownership among the less fortunate, who will, for a time at least, feel better about their financial situation. This is an illusion, however, and many of their homes must be repossessed when they cannot pay the increasing interest rates on the loans. These forfeitures lead to defaults among the subprime bonds that contain the mortgages, which in turn leads to the subprime market failure of 2007.

“‘We both know that unadulterated good things like this trade don’t just happen between little hedge funds and big Wall Street firms. I’ll do it, but only after you explain to me how you are going to fuck me.’ And the salesman explained how he was going to fuck him. And Danny did the trade.”

There’s an ironclad rule on Wall Street that if you can take advantage of a buyer, by all means do so. Smart investors realize this and behave cautiously. Really smart investors know that great investment opportunities often come with a surprise cost that’s hidden until the deal is executed, and such investors are willing to take the hit as long as the salesman is honest enough to reveal it to them.

“I did subprime first. I lived with the worst first. These guys lied to infinity. What I learned from that experience was that Wall Street didn’t give a shit what it sold.”

The bond business is murky, arcane, and lightly policed, so that salesmen have a free hand. This leads to the creation and fraudulent selling of bonds of such poor quality that they lead to the crash of 2008.