Free The Greatest Trade Ever by Gregory Zuckerman

payment to New Century, the check, along with those of other home owners, would find its way to these “structured” vehicles, where they’d start paying off holders like a cascading waterfall. Part of Joe’s payment first would go to satisfy holders of the AAA slice at the top of the pool, and then trickle down to holders of the tranches rated BBB, BBB– and BB–, each getting paid in full along the way. Losses would infiltrate up from the bottom. So the highest-rated pieces got the first chance at income but the lowest rate of return, while the lowest got the first losses and the highest potential return.
    To try to ensure that losses wouldn’t result, Wall Street firms made sure there was more revenue coming into the vehicle than it needed to pay out, just in case there were problems. Or they mixed in other kindsof revenue, such as claims on auto loans or even aircraft leases. To ensure proper diversification, loans were acquired from all over the country and from a variety of different lenders. The resulting investment product was called an asset-backed bond because it was a bond backed by a pool of mortgage loans or other assets.
    Through these structures, Wall Street took piles of risky mortgages and created shiny AAA-rated investments—handsome new bonds made from much uglier bonds. The banks usually designed the securities to just barely achieve the credit agencies’ requirements for their top ratings. They had created gold from dross.
    Over three decades, as the market to “securitize” loans into investments grew, securities firms, investment banks, and commercial banks searched high and low for mortgages and other financial assets to package into new investments. After stocks tumbled in 2000, fees from the securitization market became even more important to the firms, making them more willing to buy up all kinds of mortgage loans, especially those with high interest rates, to serve as linchpins for these investments.
    F OR INVESTORS , securitized investments were enticing. Stocks were on the ropes and it seemed a better option to plow money into anything housing related, since many other bond investments had skimpier yields. As comedian Jon Stewart later joked, just the aroma of a mortgage was enough to get investors salivating. An ingrained belief arose that the securitization process, by chopping up tens of thousands of loans of varying quality from all over the country into small investments, effectively spread risk from lenders to tens of thousands of investors around the globe. They might catch a cold but no one would likely be killed by a flu outbreak.
    One key reason investors were so taken with mortgage-related investments was that companies like Moody’s Investors Service and Standard & Poor’s that were paid to place ratings on it all, blessed the pools of loans with top ratings. Analysts at these firms scrutinized all these debt investments, laboring for weeks before even warning that they
might
adjusta rating a smidgen. If these prestigious firms placed ratings as high as AAA on the mortgage-related investments, how bad could they really be? investors asked. (In truth, the rating firms tacked on disclaimers, in really fine print, that their ratings were just opinions.) Many investors didn’t even realize they were making housing-related investments. They just focused on the top rating. Some had standing orders at various Wall Street trading desks to buy any U.S. debt rated AAA and sold with an attractive yield.
    The real estate bubble would have burst early on were it not for overeager home buyers, of course. Surging housing prices created an illusion of wealth for home owners, encouraging them to save very little and spend more than they were making. Wages were stagnant, making it hard for first-time home owners determined to buy their own home. Undeterred, many borrowed heavily to afford their first home, or to move up to their dream home, complete with granite kitchen counters,