What he underestimated was the total unabashed complicity of the upper class of American capitalism. For instance, he knew that the big Wall Street investment banks took huge piles of loans that in and of themselves might be rated BBB, threw them into a trust, carved the trust into tranches, and wound up with 60 percent of the new total being rated AAA. But he couldn't figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. "I didn't understand how they were turning all this garbage into gold," he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. "We always asked the same question," says Eisman. "Where are the rating agencies in all of this? And I'd always get the same reaction. It was a smirk."
"You have to understand this," he says. "This was the engine of doom." Then he draws a picture of several towers of debt. The first tower is made of the original subprime loans that had been piled together. At the top of this tower is the AAA tranche, just below it the AA tranche, and so on down to the riskiest, the BBB tranche—the bonds Eisman had shorted. But Wall Street had used these BBB tranches—the worst of the worst—to build yet another tower of bonds: a "particularly egregious" C.D.O. The reason they did this was that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce most of them AAA. These bonds could then be sold to investors—pension funds, insurance companies—who were allowed to invest only in highly rated securities.
The cause of the financial crisis was "simple. Greed on both sides—greed of investors and the greed of the bankers." …Greed on Wall Street was a given—almost an obligation. The problem was the system of incentives that channeled the greed.
We have entered a period of risk aversion unlike anything we've seen in our lifetime. Investors will be too wary for a while. You'll read stories about people who got rich betting against subprime mortgages and then about people who combed through the wreckage and found bargains. The next rich wave will be those who figure out where the value is. As for the average American investor, he'll be a deer in the headlights for years. It will be a while until greed gets comfortable again.