By the end of 2006, the people creating and selling subprime
mortgages and other so-called CDOs (collateralized debt
obligations), had put Goldman Sachs in exactly the same position
as every other Wall Street firm. Left to their own devices,
traders in subprime-mortgage bonds would have sunk Goldman just
as they sank Merrill Lynch, Citigroup Inc., Bear Stearns Cos. and
every other major Wall Street firm.
Enter two smart guys who trade Goldman's proprietary books
to argue to the CEO and chief financial officer that the subprime
market feels soft and that Goldman should short it. This they do,
in such massive quantities that they more than offset the long
positions in subprime held throughout the rest of the firm,
leaving Goldman short the subprime market and in a position to
make billions when it crashes. End of story.
