The Big Short: Inside the Doomsday Machine

The ratings agencies were paid by the issuer of the CDO every time they rated one: the more CDOs, the more profit. A virtually unlimited number of CDOs could be created by combining different types of mortgages—or when that got boring, combining different types of CDOs into derivatives of one another. Rarely did the ratings agencies turn down the o

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The 2008 financial crisis wasn’t exactly responsible for what was going on, but it had played a role. Investment banks like Goldman Sachs and Morgan Stanley that had once taken the most interesting trading risks had become clunkier and more heavily regulated. They were being shoved into the boring Wall Street role once played by the big commercial

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Farley conceded that there are “a lot of underwater bonds in the banking system and that can pose financial stability risks because banks are leveraged institutions. If it’s levered 10 to 1 and you have a 10 percent loss, all the equity is gone.” Which, of course, is exactly what happened to Bear Stearns, which at times was levered 50 to 1, meaning... See more

In effect, SVB didn’t have the technological infrastructure to handle the influx of deposits that came into it during the pandemic, nor the investment skill to manage all that new money. It took what appeared to be a safe route of investing in long-dated Treasuries but failed to recognize that in a rising interest rate environment they would lose v... See more