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The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . an by Nicholas Dunbar

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CHAPTER SIX

Burning Down the Housing Market

Thanks to government sponsorship (Fannie Mae and Freddie Mac) and the deregulation of lending, subprime securitization produced bonds that were ideal for repackaging into CDOs. Soon, there was so much demand for CDOs that sourcing subprime mortgages was a bottleneck slowing down profits. Dealers cleared the bottleneck by inventing CDS bets on subprime bonds that could be bundled into CDOs instead of mortgage bonds. For the dealers to balance out these bets, they needed insurance companies like AIG to buy default swaps on the safest pieces of their deals, and they needed hedge funds like Paulson & Co. to bet against subprime. As the U.S. housing bubble began to burst in late 2006, the dealers bet against ...

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