The Wall Street Casino

DealBook looks at the securitization involved in the Fabulous Fab trial:

The important thing to understand is that the securitization at issue in no way helped to create capital for anything. It was a pure gamble. One side bet that the mortgage market would collapse. The other bet it would not. I don’t see any difference between that and betting on a football game.
Consider the mortgage securitization market. First, there are mortgages, which help people buy homes. Those mortgages are packaged in a securitization and sold to investors. Some investors buy tranches that give them low yields with little chance of loss. Others get tranches with higher yields, but will lose their principal if enough borrowers default. The money put up by the investors helped to finance home buyers, which is the kind of thing a financial system should do. (It did it badly, but that is not the issue here.)
The next level of security packaged a bunch of tranches from different deals and sold securities based on those assets. By raising money to finance tranches in the first level of securitizations, it indirectly helped to finance home buyers.
Note that nobody needed to bet against either of those securitizations. The money put up by the buyers was going to homeowners, or at least to those who had previously lent to those buyers.
But the securitization that Mr. Tourre helped to create was “synthetic.” It did not raise money that went, directly or indirectly, to homeowners or to those who had lent money to them. Instead, it picked a bunch of tranches from previous securitizations — tranches that no one involved in this deal had to own — and fashioned a new securitization in which one set of investors bet those securities would work out and another set bet they would not.
It proved to be a wonderful bet for one side, and a horrid one for the other.

It also proved to be a rigged bet that was put together with the knowledge that almost all of the loans were the shittiest ones available.  And the guy betting that side got to pick what shit he wanted in there.  It is notable that Mr. Paulson has been struggling recently on his bets that weren't rigged ahead of time.  Some genius.  Maybe there is karmic justice.  Good thing he only had to pay 15% income tax (at most) on his "hard earned" money on this and other bets.