CHAPTER SIX
Burning Down the Housing Market
Thanks to government sponsorship (Fannie Mae and Freddie Mac) and the deregulation of lending, subprime securitization produced bonds that were ideal for repackaging into CDOs. Soon, there was so much demand for CDOs that sourcing subprime mortgages was a bottleneck slowing down profits. Dealers cleared the bottleneck by inventing CDS bets on subprime bonds that could be bundled into CDOs instead of mortgage bonds. For the dealers to balance out these bets, they needed insurance companies like AIG to buy default swaps on the safest pieces of their deals, and they needed hedge funds like Paulson & Co. to bet against subprime. As the U.S. housing bubble began to burst in late 2006, the dealers bet against ...
Get The Devil's Derivatives now with the O’Reilly learning platform.
O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.
