This is how they went about bankrupting America

Hat tip to stephdray over at DKos for some insight I just had to pass on:

So I was completely baffled by Henry Paulson's announcement yesterday that it wouldn't help to buy up the toxic mortgages as promised in the bailout.

At least, it baffled me until I read this article. And that's when it occurred to me--he can't buy up the toxic mortgages to stave off the meltdown because a vast majority of these loans don't exist.

Here's the money quote from this long but startling article by Michael Lewis in Portfolio.com:

That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. "They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford," Eisman says. "They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?"

Read the whole article. It's a real eye-opener. And if this doesn't convince you that we should bring tarring and feathering back to the forefront of our criminal justice agenda, nothing will.

What are the consequences of letting all the investment banking firms fail? I can think of some better uses for that 700 billion.