Spider-Man at The Venetian

Golfing with Eisman wasn't like golfing with other Wall Street people. The round usually began with a collective discomfort on the first tee, after Eisman turned up wearing something that violated the Wall Street golfer's notion of propriety. On January 28, 2007, he arrived at the swanky Bali Hai Golf Club in Las Vegas dressed in gym shorts, t-shirt, and sneakers. Strangers noticed; Vinny and Danny squirmed. "C'mon, Steve," Danny pleaded with a man who, technically, was his boss, "there's an etiquette here. You at least have to wear a collared shirt." Eisman took the cart to the clubhouse and bought a hoodie. The hoodie covered up his t-shirt and made him look a lot like a guy who had just bought a hoodie to cover up his t-shirt. In hoodie, gym shorts, and sneakers, Eisman approached his first shot. Like every other swing of the Eisman club, this was less a conclusive event than a suggestion. Displeased with where the ball had landed, he pulled another from his bag and dropped it in a new and better place. Vinny would hit his drive in the fairway; Danny would hit his in the rough; Steve would hit his in the bunker, march into the sand, and grab the ball and toss it out, near Vinny's. It was hard to accuse him of cheating, as he didn't make the faintest attempt to disguise what he was doing. He didn't even appear to notice anything unusual in the pattern of his game. The ninth time Eisman retrieved a ball from some sand trap, or pretended his shot had not splashed into the water, he acted with the same unapologetic aplomb he had demonstrated the first time. "Because his memory is so selective, he has no scars from prior experience," said Vinny. He played the game like a child, or like someone who was bent on lampooning a sacred ritual, which amounted to the same thing. "The weird thing is," said Danny, "he's actually not bad."

After a round of golf, they headed out to a dinner at the Wynn hotel hosted by Deutsche Bank. This was the first time Eisman had ever been to a conference for bond market people and, not knowing what else to do, he had put himself in Greg Lippmann's hands. Lippmann had rented a private room in some restaurant and invited Eisman and his partners to what they assumed was something other than a free meal. "Even when he had an honest agenda, there was always something underneath the honest agenda," said Vinny. Any dinner that was Lippmann's idea must have some hidden purpose--but what?

As it turned out, Lippmann had a new problem: U.S. house prices were falling, subprime loan defaults were rising, yet subprime mortgage bonds somehow held firm, as did the price of insuring them. He was now effectively short $10 billion in subprime mortgage bonds, and it was costing him $100 million a year in premiums, with no end in sight. "He was obviously getting his nuts blown off," said Danny. Thus far Lippmann's giant bet had been subsidized by investors, like Steve Eisman, who paid him a toll when they bought and sold credit default swaps, but investors like Steve Eisman were losing heart. Some of Lippmann's former converts suspected that the subprime mortgage bond market was rigged by Wall Street to insure that credit default swaps would never pay off; others began to wonder if the investors on the other side of their bet might know something that they didn't; and some simply wearied of paying insurance premiums to bet against bonds that never seemed to move. Lippmann had staged this great game of tug-of-war, assembled a team to pull on his end of the rope, and now his teammates were in full flight. He worried that Eisman might quit, too.

The teppanyaki room inside the Okada restaurant consisted of four islands, each with a large, cast-iron hibachi and dedicated chef. Around each island Lippmann seated a single hedge fund manager whom he had persuaded to short subprime bonds, along with investors who were long those same bonds. The hedge fund people, he hoped, would see just how stupid the investors on the other side of those bets were, and cease to worry that the investors knew something they did not. This was shrewd of him: Danny and Vinny never stopped worrying if they were the fools at Lippmann's table. "We understood the subprime lending market and knew the loans were going bad," said Vinny. "What we didn't have any comfort in was the bond market machine. The whole reason we went to Vegas was we still felt we needed to learn how we were going to get screwed, if we were going to get screwed."

Eisman took his assigned seat between Greg Lippmann and a fellow who introduced himself as Wing Chau and said that he ran an investment firm called Harding Advisory. When Eisman asked exactly what Harding Advisory advised, Wing Chau explained that he was a CDO manager. "I had no idea there was such a thing as a CDO manager," said Eisman. "I didn't know there was anything to manage." Later Eisman would fail to recall what Wing Chau looked like, what he wore, where he'd come from, or what he ate and drank--everything but the financial idea he represented. But from his seat across the hibachi, Danny Moses watched and wondered about the man Lippmann had so carefully seated next to Eisman. He was short, with a Wall Street belly--not the bleacher bum's boiler but the discreet, necessary pouch of a squirrel just before winter. He'd graduated from the University of Rhode Island, earned a business degree at Babson College, and spent most of his career working sleepy jobs at sleepy life insurance companies--but all that was in the past. He was newly, obviously rich. "He had this smirk, like, I know better," said Danny. Danny didn't know Wing Chau, but when he heard that he was the end buyer of subprime CDOs, he knew exactly who he was: the sucker. "The truth is that I didn't really want to talk to him," said Danny, "because I didn't want to scare him."

When they saw that Lippmann had seated Eisman right next to the sucker, both Danny and Vinny had the same thought: Oh no. This isn't going to end well. Eisman couldn't contain himself. He'd figure out the guy was a fool, and let him know it, and then where would they be? They needed fools; only fools would take the other side of their trades. And they wanted to do more trades. "We didn't want people to know what we were doing," said Vinny. "We were spies, on a fact-finding mission." They watched Eisman double-dip his edamame in the communal soy sauce--dip, suck, redip, resuck--and waited for the room to explode. There was nothing to do but sit back and enjoy the show. Eisman had a curious way of listening; he didn't so much listen to what you were saying as subcontract to some remote region of his brain the task of deciding whether whatever you were saying was worth listening to, while his mind went off to play on its own. As a result, he never actually heard what you said to him the first time you said it. If his mental subcontractor detected a level of interest in what you had just said, it radioed a signal to the mother ship, which then wheeled around with the most intense focus. "Say that again," he'd say. And you would! Because now Eisman was so obviously listening to you, and, as he listened so selectively, you felt flattered. "I keep looking over at them," said Danny. "And I see Steve saying over and over, Say that again. Say that again."

Later, whenever Eisman set out to explain to others the origins of the financial crisis, he'd start with his dinner with Wing Chau. Only now did he fully appreciate the central importance of the so-called mezzanine CDO--the CDO composed mainly of triple-B-rated subprime mortgage bonds--and its synthetic counterpart: the CDO composed entirely of credit default swaps on triple-B-rated subprime mortgage bonds. "You have to understand this," he'd say. "This was the engine of doom." He'd draw a picture of several towers of debt. The first tower was the original subprime loans that had been piled together. At the top of this tower was the triple-A tranche, just below it the double-A tranche, and so on down to the riskiest, triple-B tranche--the bonds Eisman had bet against. The Wall Street firms had taken these triple-B tranches--the worst of the worst--to build yet another tower of bonds: a CDO. A collateralized debt obligation. The reason they'd done this is that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce 80 percent of the bonds in it triple-A. These bonds could then be sold to investors--pension funds, insurance companies--which were allowed to invest only in highly rated securities. It came as news to Eisman that this ship of doom was piloted by Wing Chau and people like him. The guy controlled roughly $15 billion, invested in nothing but CDOs backed by the triple-B tranche of a mortgage bond or, as Eisman put it, "the equivalent of three levels of dog shit lower than the original bonds." A year ago, the main buyer of the triple-A-rated tranche of subprime CDOs--which is to say the vast majority of CDOs--had been AIG. Now that AIG had exited the market, the main buyers were CDO managers like Wing Chau. All by himself, Chau generated vast demand for the riskiest slices of subprime mortgage bonds, for which there had previously been essentially no demand. This demand led inexorably to the supply of new home loans, as material for the bonds. The soy sauce in which Eisman double-dipped his edamame was shared by a man who had made it possible for tens of thousands of actual human beings to be handed money they could never afford to repay.

As it happened, FrontPoint Partners had spent a lot of time digging around in those loans, and knew that the default rates were already sufficient to wipe out Wing Chau's entire portfolio. "God," Eisman said to him. "You must be having a hard time."

"No," Wing Chau said. "I've sold everything out."

Say that again.

It made no sense. The CDO manager's job was to select the Wall Street firm to supply him with subprime bonds that served as the collateral for CDO investors, and then to vet the bonds themselves. The CDO manager was further charged with monitoring the hundred or so individual subprime bonds inside each CDO, and replacing the bad ones, before they went bad, with better ones. That, however, was mere theory; in practice, the sorts of investors who handed their money to Wing Chau, and thus bought the triple-A-rated tranche of CDOs--German banks, Taiwanese insurance companies, Japanese farmers' unions, European pension funds, and, in general, entities more or less required to invest in triple-A-rated bonds--did so precisely because they were meant to be foolproof, impervious to losses, and unnecessary to monitor or even think about very much. The CDO manager, in practice, didn't do much of anything, which is why all sorts of unlikely people suddenly hoped to become one. "Two guys and a Bloomberg terminal in New Jersey" was Wall Street shorthand for the typical CDO manager. The less mentally alert the two guys, and the fewer the questions they asked about the triple-B-rated subprime bonds they were absorbing into their CDOs, the more likely they were to be patronized by the big Wall Street firms. The whole point of the CDO was to launder a lot of subprime mortgage market risk that the firms had been unable to place straightforwardly. The last thing you wanted was a CDO manager who asked lots of tough questions.

The bond market had created what amounted to a double agent--a character who seemed to represent the interests of investors when he better represented the interests of Wall Street bond trading desks. To assure the big investors who had handed their billions to him that he had their deep interests at heart, the CDO manager kept ownership of what was called the "equity," or "first loss" piece, of the CDO--the piece that vanished first when the subprime loans that ultimately supplied the CDO with cash defaulted. But the CDO manager was also paid a fee of 0.01 percent off the top, before any of his investors saw a dime, and another, similar fee, off the bottom, as his investor received their money back. That doesn't sound like much, but, when you're running tens of billions of dollars with little effort and no overhead, it adds up. Just a few years earlier, Wing Chau was making $140,000 a year managing a portfolio for the New York Life Insurance Company. In one year as a CDO manager, he'd taken home $26 million, the haul from half a dozen lifetimes of working at New York Life.

Now, almost giddily, Chau explained to Eisman that he simply passed all the risk that the underlying home loans would default on to the big investors who had hired him to vet the bonds. His job was to be the CDO "expert," but he actually didn't spend a lot of time worrying about what was in CDOs. His goal, he explained, was to maximize the dollars in his care. He was now doing this so well that, from January 2007 until the market crashed in September, Harding Advisory would be the world's biggest subprime CDO manager. Among its other achievements, Harding had established itself as the go-to buyer for Merrill Lynch's awesome CDO machine, notorious not only for its rate of production (Merrill created twice as many of the things as the next biggest Wall Street firm) but also for its industrial waste (its CDOs were later proven to be easily the worst). "He 'managed' the CDOs," said Eisman, "but managed what? I was just appalled that the structured finance market could be so insane as to allow someone to manage a CDO portfolio without having any exposure to the CDOs. People would pay up to have someone 'manage' their CDOs--as if this moron was helping you. I thought, You prick, you don't give a fuck about the investors in this thing." Chau's real job was to serve as a new kind of front man for the Wall Street firms he "hired" investors felt better buying a Merrill Lynch CDO if it didn't appear to be run by Merrill Lynch.

There was a reason Greg Lippmann had picked Wing Chau to sit beside Steve Eisman. If Wing Chau detected Eisman's disapproval, he didn't show it; instead, he spoke to Eisman in a tone of condescension. I know better. "Then he says something that blew my mind," said Eisman. "He says, 'I love guys like you who short my market. Without you I don't have anything to buy.'"

Say that again.

"He says to me, 'The more excited that you get that you're right, the more trades you'll do, and the more trades you do, the more product for me.'"

That's when Steve Eisman finally understood the madness of the machine. He and Vinny and Danny had been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the triple-B tranche of subprime mortgage-backed bonds without fully understanding why those firms were so eager to accept them. Now he was face-to-face with the actual human being on the other side of his credit default swaps. Now he got it: The credit default swaps, filtered through the CDOs, were being used to replicate bonds backed by actual home loans. There weren't enough Americans with shitty credit taking out loans to satisfy investors' appetite for the end product. Wall Street needed his bets in order to synthesize more of them. "They weren't satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn't afford," said Eisman. "They were creating them out of whole cloth. One hundred times over! That's why the losses in the financial system are so much greater than just the subprime loans. That's when I realized they needed us to keep the machine running. I was like, This is allowed?"

Wing Chau didn't know he'd been handpicked by Greg Lippmann to persuade Steve Eisman that the people on the other end of his credit default swaps were either crooks or morons, but he played the role anyway. Between shots of sake he told Eisman that he would rather have $50 billion in crappy CDOs than none at all, as he was paid mainly on volume. He told Eisman that his main fear was that the U.S. economy would strengthen, and dissuade hedge funds from placing bigger bets against the subprime mortgage market. Eisman listened and tried to understand how an investor on opposite ends of his bets could be hoping for more or less the same thing he was--and how any insurance company or pension fund could hand its capital to Wing Chau. There was only one answer: The triple-A ratings gave everyone an excuse to ignore the risks they were running.

Danny and Vinny watched them closely through the hibachi steam. As far as they could tell, Eisman and Wing Chau were getting along famously. But when the meal was over, they watched Eisman grab Greg Lippmann, point to Wing Chau, and say, "Whatever that guy is buying, I want to short it." Lippmann took it as a joke, but Eisman was completely serious: He wanted to place a bet specifically against Wing Chau. "Greg," Eisman said, "I want to short his paper. Sight unseen." Thus far Eisman had bought only credit default swaps on subprime mortgage bonds; from now on he'd buy specifically credit default swaps on Wing Chau's CDOs. "He finally met the enemy, face-to-face," said Vinny.

In what amounted to a brief attempt to live someone else's life, Charlie Ledley selected from the wall a Beretta pistol, a sawed-off shotgun, and an Uzi. Not long before he'd walked out the door for Las Vegas, he'd dashed an e-mail off to his partner Ben Hockett, who planned to meet him there, and Jamie Mai, who didn't. "Do you guys think we're screwed since we haven't preregistered for anything?" he asked. It wasn't the first time Cornwall Capital had heard about some big event in the markets to which they hadn't been formally invited and more or less invited themselves, and it wouldn't be the last. "If you just kind of show up at these things," said Jamie, "they almost always let you in." The only people Charlie knew in Vegas were a few members of the subprime mortgage machine at Bear Stearns, and he'd never actually met them in person. Nevertheless, they had sent him an e-mail telling him, after he landed in Las Vegas, to meet them not at the conference but at this indoor shooting range, a few miles from the strip. "We goin' shootin on Sunday...," it began. Charlie was so taken aback, he called to ask them what it meant. "I was like, 'So you're going to go shoot...guns?'"

That Sunday afternoon of January 28, at The Gun Store in Las Vegas, it wasn't hard to spot the Bear Stearns CDO salesmen. They came dressed in khakis and polo shirts and were surrounded by burly men in tight black t-shirts who appeared to be taking the day off from hunting illegal immigrants with the local militia. Behind the cash register, the most sensational array of pistols and shotguns and automatic weapons lined the wall. To the right were the targets: a photograph of Osama bin Laden, a painting of Osama bin Laden as a zombie, various hooded al Qaeda terrorists, a young black kid attacking a pretty white woman, an Asian hoodlum waving a pistol. "They put down the Bear Stearns credit card and started buying rounds of ammunition," said Charlie. "And so I started picking my guns." It was the Uzi that made the biggest impression on him. That, and the giant photograph of Saddam Hussein he selected from the wall of targets. The shotgun kicked and bruised your shoulder, but the Uzi, with far more killing power, was almost gentle; there was a thrilling disconnect between the pain you experienced and the damage you caused. "The Beretta was fun but the Uzi was totally awesome," said Charlie, who left The Gun Store with both a lingering feeling of having broken some law of nature, and an unanswered question: Why had he been invited? The Bear Stearns guys had been great, but no one had uttered a word about subprime mortgages or CDOs. "It was totally weird, because I'd never met the guys before and I'm the only Bear Stearns customer who's there," said Charlie. "They were paying for all this ammo and so I'm like, 'Guys, I can buy a few rounds for myself if you want,' but they insisted on treating me like the customer." Of course, the safest way to expense to one's Wall Street firm a day of playing Full Metal Jacket was to invite some customer along. And, of course, the most painless customer to invite was one whose business was so trivial that his opinion of the festivities didn't actually matter. That these thoughts never occurred to Charlie told you something about him: He was not nearly as cynical as he needed to be. But that would soon change.

The next morning, Charlie and Ben wandered the halls of The Venetian. "Everyone who was trying to sell something was wearing a tie," said Ben. "Everyone who was there to buy wasn't. It was hard to find someone I wanted to talk to. We were just kind of interlopers, walking around." They knew just one person in the entire place--David Burt, the former BlackRock guy whom they were now paying $50,000 a month to evaluate the CDOs they were betting against--but they didn't think that mattered, as their plan was to go to the open sessions, the big speeches and panel discussions. "It was not entirely clear why we were there," said Ben. "We were trying to meet people. Charlie would sneak up on whoever was at the podium after speeches. We were trying to find people who could tell us why we were wrong." They were looking for some persuasive mirror image of themselves. Someone who could tell them why what the market deemed impossible was at least improbable.

Charlie's challenge was to suck unsuspecting market insiders into arguments before they thought to ask him who he was or what he did. "The consistent reaction whenever we met someone was, like, 'Wait, where did you guys come from?' They were just baffled," said Charlie. "People were like, 'Why are you here?'"

A guy from a rating agency on whom Charlie tested Cornwall's investment thesis looked at him strangely and asked, "Are you sure you guys know what you're doing?" The market insiders didn't agree with them, but they didn't offer persuasive counter-arguments. Their main argument, in defense of subprime CDOs, was that "the CDO buyer will never go away." Their main argument, in defense of the underlying loans, was that, in their short history, they had never defaulted in meaningful amounts. Above the roulette tables, screens listed the results of the most recent twenty spins of the wheel. Gamblers would see that it had come up black the past eight spins, marvel at the improbability, and feel in their bones that the tiny silver ball was now more likely to land on red. That was the reason the casino bothered to list the wheel's most recent spins: to help gamblers to delude themselves. To give people the false confidence they needed to lay their chips on a roulette table. The entire food chain of intermediaries in the subprime mortgage market was duping itself with the same trick, using the foreshortened, statistically meaningless past to predict the future.

"Usually, when you do a trade, you can find some smart people on the other side of it," said Ben. "In this instance we couldn't."

"Nobody we talked to had any credible reason to think this wasn't going to become a big problem," said Charlie. "No one was really thinking about it."

One of the Bear Stearns CDO guys, after Charlie asked him what was likely to happen to these CDOs in seven years, said, "Seven years? I don't care about seven years. I just need it to last for another two."

Three months earlier, when Cornwall bought their first $100 million in credit default swaps on the double-A-rated tranches of subprime CDOs, they believed they were making a cheap bet on an unlikely event--$500,000 a year in premium for the chance to make $100,000,000. The market, and the rating agencies, effectively had set the odds of default at 1 in 200. They thought the odds were better than that--say, 1 in 10. Still, it was, like most of their bets, a long shot. An intelligent long shot, perhaps, but a long shot nonetheless. The more they listened to the people who ran the subprime market, the more they felt the collapse of double-A-rated bonds wasn't a long shot at all, but likely. A thought crossed Ben's mind: These people believed that the collapse of the subprime mortgage market was unlikely precisely because it would be such a catastrophe. Nothing so terrible could ever actually happen.

The first morning of the conference, they'd followed a crowd of thousands out of the casino and into the vast main ballroom to attend the opening ceremony. It was meant to be a panel discussion, but of course the men on the panel had little interest in talking to each other and more interest in delivering measured, prepared remarks. They'd watch a dozen of these events over the next three days and all were tedious. This one session was different, though, because its moderator appeared to be drunk, or at least unhinged. His name was John Devaney and he ran a hedge fund that invested in subprime mortgage bonds, United Capital Markets. For a decade now, Devaney had sponsored this conference--called ASF, or the American Securitization Forum, in part because it sounded more dignified than the Association for Subprime Lending. To the extent that the market for subprime mortgage bonds had moral leaders, John Devaney was one. He was also an enthusiastic displayer of his own wealth. He owned a Renoir, a Gulfstream, a helicopter, plus, of course, a yacht. This year he'd paid some huge sum to fly in Jay Leno to serve as the entertainment.

Now, looking as if he had just rolled in from a night on the town without pausing to take a nap, John Devaney delivered what was clearly an extemporaneous rant about the state of the subprime market. "It was incredible," said Charlie. "Stream of consciousness. He went on about how the ratings agencies were whores. How the securities were worthless. How they all knew it. He gave words to stuff we were just suspecting. It was like he was talking out of school. When he was finished there was complete silence. No one specifically attempted a defense. They just talked around him. It was like everyone pretended he hadn't said it."* On the one hand, it was exhilarating to hear a market insider say what he thought to be true; on the other, if the market became self-aware, its madness couldn't last long. Charlie and Jamie and Ben assumed they had time to think things over before they went out and bought even more credit default swaps on the double-A tranche of subprime CDOs. "That speech spooked us," said Ben. "It seemed rather than six months to get our trade on we had one week."

The trouble, as ever, was finding Wall Street firms willing to deal with them. Their one source of supply, Bear Stearns, suddenly seemed more interested in shooting than in trading with them. Every other firm treated them as a joke. Cornhole Capital. But here, in Las Vegas, luck found them. To their surprise, they found that the consultant they now employed to analyze CDOs for them, David Burt, enjoyed serious stature in the industry. "David Burt was like God in Vegas," said Charlie. "We started just following him around. 'Hey. That guy you're talking to. We're paying him--can we talk to you too?'" This rented God introduced Charlie to a woman from Morgan Stanley named Stacey Strauss. Her job was to find investors who wanted to buy credit default swaps as quickly as she could. Charlie never figured out why she was willing in the extreme to bend Morgan Stanley's usual standards to do business with Cornwall. Charlie also accosted a man who analyzed the subprime mortgage bond market for Wachovia Bank, who happened to have been on the panel moderated by the shocking John Devaney. During the opening panel discussion, he, like everyone else, had pretended he hadn't heard John Devaney. When Devaney was finished, the Wachovia guy had given his little speech about the fundamental soundness of the subprime mortgage bond market. As he came off the stage, Charlie ambushed him and asked him if maybe Wachovia didn't want to put its money where its mouth was and sell him some credit default swaps.

The morning after his dinner with Wing Chau, Eisman woke up to his first glimpse of the bond market in the flesh, and a lot of sensationally phony baroque ceiling frescoes. The Venetian hotel--Palazzo Ducale on the outside, Divine Comedy on the inside--was overrun by thousands of white men in business casual now earning their living, one way or another, off subprime mortgages. Like all of Las Vegas, The Venetian was a jangle of seemingly random effects designed to heighten and exploit irrationality: the days that felt like nights and the nights that felt like days; the penny slots and the cash machines that spat out hundred-dollar bills; the grand hotel rooms that cost so little and made you feel so big. The point of all of it was to alter your perception of your chances and your money, and all of it depressed Eisman: He didn't even like to gamble. "I wouldn't know how to calculate odds if my life depended on it," he said. At the end of each day Vinny would head off to play low-stakes poker, Danny would join Lippmann and the other bond people at the craps tables, and Eisman would go to bed. That craps was the game of choice of the bond trader was interesting, though. Craps offered the player the illusion of control--after all, he rolled the dice--and a surface complexity that masked its deeper idiocy. "For some reason, when these people are playing it they actually believe they have the power to make the dice work," said Vinny.

Thousands and thousands of serious financial professionals, most of whom, just a few years ago, had been doing something else with their lives, were now playing craps with the money they had made off subprime mortgage bonds. The subprime mortgage industry Eisman once knew better than anyone on the planet had been a negligible corner of the capital markets. In just a few years it had somehow become the most powerful engine of profits and employment on Wall Street--and it made no economic sense. "It was like watching an unthinking machine that could not stop itself," he said. He felt as if he had moved into a new house, opened the door to what he presumed was a small closet, and discovered an entirely new wing. "I'd been to equity conferences," said Eisman. "This was totally different. At an equity conference you're lucky if you get five hundred people. There were seven thousand people at this thing. Just the fact that no one from the equity world was there told you that no one had figured it out. We knew no one. We still assumed we were the only ones who were short."

He had no interest in listening to other people's speeches. He had no interest in attending the panel discussion and hearing the potted remarks. He wanted private sessions with market insiders. Lippmann had introduced them to the people inside Deutsche Bank peddling CDOs to investors, and these helpful Deutsche Bank people had arranged for Eisman and his partners to meet the bond market's financial intermediaries: the mortgage lenders, the banks that packaged the mortgage loans into mortgage bonds, the bankers who repackaged the bonds into CDOs, and the rating agencies that blessed the process at each stage. The only interested parties missing from the conference were the ultimate borrowers, the American home buyers, but even they, in a way, were on hand, serving drinks, spinning wheels, and rolling dice. "Vegas was booming," said Danny. "The homeowners were at the fucking tables." A friend of Danny's returned from a night on the town to report he'd met a stripper with five separate home equity loans.*

The Deutsche Bank CDO salesman--a fellow named Ryan Stark--had been assigned to keep an eye on Eisman and prevent him from causing trouble. "I started getting these e-mails from him, before the conference," said Danny. "He was nervous about us. It was like, 'I just want to clarify the purpose of the meetings,' and, 'Just to be clear why we're meeting...' He wanted to make sure we knew we remembered that we were there to buy the bonds." Deutsche Bank had even sent along the formal handouts intended for subprime buyers, as a kind of script for them to follow. "The purpose of the conference is to convince people it's still okay to create and to buy this shit," said Danny. "It was unheard of for an equity investor looking to short the bonds to come in and scope the place out for information. The only way we got these one-on-one meetings was by saying that we weren't short. Deutsche Bank escorted us, to make sure we didn't blow up their relationships. They put a salesman in the meeting just to monitor us."

There was of course no point in trying to monitor Eisman. He saw himself as a crusader, a champion of the underdog, an enemy of sinister authority. He saw himself, roughly speaking, as Spider-Man. He was perfectly aware of how absurd it sounded when, for instance, his wife told people, "My husband thinks he and Spider-Man are living the same life." Eisman didn't go around telling strangers about the shocking number of parallels between himself and Peter Parker--when they had gone to college, what they had studied, when they'd married, and on and on--or that, by the time he was in law school, he was picking up the latest Spider-Man comic half expecting to discover in it the next turn his life would take. But Eisman was quick to see narratives, he explained the world in stories, and this was one of the stories he used to explain himself.

The first sign that Spider-Man had no interest in Deutsche Bank's dark dealings came at a speech that morning, given by the CEO of Option One, the mortgage originator owned by H&R Block. Option One had popped onto Eisman's radar screen seven months earlier, in June 2006, when the company announced a surprising loss in its portfolio of subprime mortgage loans. The loss was surprising because Option One was in the business of making loans and selling them off to Wall Street--they weren't meant to be taking risk. In these deals, however, there was a provision that allowed Wall Street to put the loans back to Option One if the borrowers failed to make their first payment. "Who takes out a home loan and doesn't make the first payment?" asked Danny Moses, putting the matter one way. "Who the fuck lends money to people who can't make the first payment?" asked Eisman, putting it another.

When the CEO of Option One got to the part of his speech about Option One's subprime loan portfolio, he claimed that the company had put its problems behind it and was now expecting a (modest) loss rate on its loans of 5 percent. Eisman raised his hand. Moses and Daniel sank in their chairs. "It wasn't a Q&A," says Moses. "The guy was giving a speech. He sees Steve's hand and says, 'Yes?'"

"Would you say that five percent is a probability or a possibility?" asked Eisman.

A probability, said the CEO, and went back to giving his speech.

Eisman had his hand up in the air again, waving it around. Oh no, thought Moses, and sank deeper in his chair. "The one thing Steve always says is that you must assume they are lying to you," said Daniel. "They will always lie to you." Danny and Vinny both knew what Eisman thought of these subprime lenders, but didn't see the need for him to express it here, in this manner. For Steve wasn't raising his hand to ask a question. Steve had his thumb and index finger in a big circle. Steve was using his fingers to speak on his behalf. "Zero!" they said.

"Yes?" asked the obviously irritated CEO. "Is that another question?"

"No," said Eisman. "It's a zero. There is zero probability that your default rate will be five percent." The losses on subprime loans would be far, far greater. Before the guy could reply, Eisman's cell phone rang. Rather than shut it down, Eisman reached in his pocket and answered it. "Excuse me," he said, standing up. "But I need to take this call." And with that, he walked out of the speech. The caller was his wife.

"It wasn't important at all," she says with a sigh. "I was a prop."

After that something must have come over Eisman, for he stopped looking for a fight and started looking for higher understanding. He walked around the Las Vegas casino incredulous at the spectacle before him: seven thousand people, all of whom seemed delighted with the world as they found it. A society with deep, troubling economic problems had rigged itself to disguise those problems, and the chief beneficiaries of the deceit were its financial middlemen. How could this be? Eisman actually wondered, albeit very briefly, if he was missing something. "He kept saying, 'What the hell is going on here? Who the fuck are all these people?'" said Danny Moses. The short answer to that second question was: the optimists. The subprime mortgage market in its current incarnation never had done anything but rise. The people in it who were regarded as successes were those who had always said "buy." Now they should really all be saying "sell," but they didn't know how to do it. "You always knew that fixed income guys thought they knew more than you did," said Eisman, "and generally that was true. I wasn't a fixed income guy, but here I'd taken this position that was a bet against their whole industry, and I wanted to know if they know something I don't. Could it really be this obvious? Could it really be this simple?" He entered private meetings with the lenders and the bankers and the rating agencies probing for an intelligence he had yet to detect. "He was in learning mode," said Vinny. "When he's fascinated about a subject, his curiosity becomes far more important than being confrontational. He'll claim it was years of therapy that enabled him to behave, but the truth is it was the first time he was connecting all the dots."

Much of Steve Eisman wanted to believe the worst, and that gave him a huge tactical advantage in the U.S. financial markets circa 2007. There was still some part of him, however, that was as credulous as the little kid who lent his new bike to a total stranger. He was still capable of being shocked. His experience with Household Finance had disabused him of any hope that the government would intercede to prevent rich corporations from doing bad things to poor people. Inside the free market, however, there might be some authority capable of checking its excess. The rating agencies, in theory, were just such an authority. As the securities became more complex, the rating agencies became more necessary. Everyone could evaluate a U.S. Treasury bond; hardly anyone could understand a subprime mortgage-backed CDO. There was a natural role for an independent arbiter to pass judgment on these opaque piles of risky loans. "In Vegas it became clear to me that this entire huge industry was just trusting in the ratings," Eisman said. "Everyone believed in the ratings, so they didn't have to think about it."

Eisman had worked on Wall Street for nearly two decades, but, like most stock market people, he'd never before sat down with anyone from Moody's or Standard & Poor's. Unless they covered insurance companies, which lost their ability to sell their product the moment their ability to meet their obligations was thrown into doubt, stock market people didn't pay much attention to the rating agencies. Now Eisman had his first exchanges with them, and what struck him immediately--and struck Danny and Vinny, too--was the caliber of their employees. "You know how when you walk into a post office you realize there is such a difference between a government employee and other people," said Vinny. "The ratings agency people were all like government employees." Collectively they had more power than anyone in the bond markets, but individually they were nobodies. "They're underpaid," said Eisman. "The smartest ones leave for Wall Street firms so they can help manipulate the companies they used to work for. There should be no greater thing you can do as an analyst than to be the Moody's analyst. It should be, 'I can't go higher as an analyst.' Instead it's the bottom! No one gives a fuck if Goldman likes General Electric paper. If Moody's downgrades GE paper, it is a big deal. So why does the guy at Moody's want to work at Goldman Sachs? The guy who is the bank analyst at Goldman Sachs should want to go to Moody's. It should be that elite."

The entire industry had been floated on the backs of the rating agencies, but the people who worked at the rating agencies barely belonged in the industry. If they roamed the halls they might be mistaken, just, for some low-level commercial bankers at Wells Fargo, or flunkies at mortgage lenders, such as Option One: nine-to-fivers. They wore suits in Vegas, which told you half of what you needed to know about them--the other half you got from the price of those suits. Just about everyone else dressed business casual; the few guys who were actually important people wore three-thousand-dollar Italian suits. (One of the mysteries of the Wall Street male was that he was ignorant of the finer points of couture but could still tell in an instant how much another Wall Street male's suit had cost.) The rating agencies guys wore blue suits from J.C. Penney, with ties that matched too well, and shirts that were starched just a bit too stiffly. They weren't players and they didn't know the people who were, either. They got paid to rate the bonds of Lehman and Bear Stearns and Goldman Sachs, but they couldn't tell you the names of, or any of the other important facts about, the guys at Lehman and Bear Stearns and Goldman Sachs who were making a fortune exploiting loopholes in the rating agencies' models. They appeared to know enough to justify their jobs, and nothing more. They seemed timid, fearful, and risk-averse. As Danny put it, "You wouldn't see them at the craps table."

It was in Vegas that Eisman realized that "all the stuff I was worried about, the ratings agencies didn't care. I remember sitting there thinking, Jeez, this is really pathetic. You know when you're with someone who is intellectually powerful: You just know it. When you sit down with Richard Posner [the legal scholar], you know it's Richard Posner. When you sit down with the ratings agencies you know it's the ratings agencies." To judge from their behavior, all the rating agencies worried about was maximizing the number of deals they rated for Wall Street investment banks, and the fees they collected from them. Moody's, once a private company, had gone public in 2000. Since then its revenues had boomed, from $800 million in 2001 to $2.03 billion in 2006. Some huge percentage of the increase--more than half, certainly, but exactly how much more than half they declined to tell Eisman--flowed from the arcane end of the home finance sector, known as structured finance. The surest way to attract structured finance business was to accept the assumptions of the structured finance industry. "We asked everyone the same two questions," said Vinny. "What is your assumption about home prices, and what is your assumption about loan losses." Both rating agencies said they expected home prices to rise and loan losses to be around 5 percent--which, if true, meant that even the lowest-rated, triple-B, subprime mortgage bonds crafted from them were money-good. "It was like everyone had agreed in advance that five percent was the number," said Eisman. "They all said five percent. It was a party and there was a party line."* What shocked Eisman was that none of the people he met in Las Vegas seemed to have wrestled with anything. They were doing what they were doing without thinking very much about it.

It was in Las Vegas that Eisman and his associates' attitude toward the U.S. bond market hardened into something like its final shape. As Vinny put it, "That was the moment when we said, 'Holy shit, this isn't just credit. This is a fictitious Ponzi scheme.'" In Vegas the question lingering at the back of their minds ceased to be, Do these bond market people know something we do not? It was replaced by, Do they deserve merely to be fired, or should they be put in jail? Are they delusional, or do they know what they're doing? Danny thought that the vast majority of the people in the industry were blinded by their interests and failed to see the risks they had created. Vinny, always darker, said, "There were more morons than crooks, but the crooks were higher up." The rating agencies were about as low as you could go and still be in the industry, and the people who worked for them really did not seem to know just how badly they had been gamed by big Wall Street firms. Their meeting in Las Vegas with the third and smallest rating agency, Fitch Ratings, stuck in Vinny's mind. "I know you're sort of irrelevant," he'd said to them, as politely as he could. "There are these two big guys everyone pays attention to, and then there is you. If you want to make a statement--and get people to notice you--why don't you go your own way and be the honest one?" He expected the good people of Fitch Ratings service to see the point, and maybe even chuckle nervously. Instead they seemed almost offended. "They went all pure on me," said Vinny. "It was like they didn't understand what I was saying."

They had left for Las Vegas with a short position in subprime mortgage bonds of a bit less than $300 million. Upon their return they raised it to $550 million, with new bets against the CDOs created by Wing Chau. With only $500 million under management, the position now overwhelmed their portfolio. They didn't stop there, however. Their first day back in the office, they shorted the stock of Moody's Corporation, at $73.25 a share, then went searching for other companies and other people, like Wing Chau, on the other side of their trade.