But the scarcity of truly crappy subprime-mortgage bonds no longer mattered. The big Wall Street firms had just made it possible to short even the tiniest and most obscure subprime-mortgage-backed bond by creating, in effect, a market of side bets. Instead of shorting the actual BBB bond, you could now enter into an agreement for a credit-default swap with Deutsche Bank or Goldman Sachs. It cost money to make this side bet, but nothing like what it cost to short the stocks, and the upside was far greater.
Michael Lewis, over at Conde Naste. (Emphasis mine.)
How true Michael is. The cost, as we’re finding out, is far, far greater than if investors had simply been shorting stocks and hedging investments. A very good read.
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