Steve Eisman of Front Point Partners called "spoof" on CDOs

RAMONA, CA - OCTOBER 30:  A real estate for sa...Image by Getty Images via DaylifeMotleyFool has an interesting piece with Michael Lewis (Liars Poker fame), who talks about the huge sums Steve Eisman made for his funds by spotting the lunacy surrounding certain Collateralised Debt Obligations [CDOs] as well as Mortgage Backed Securities [MBS] and shorting them via credit default swaps. In essence, he paid a small annual premium to an investment bank as insurance against these instruments defaulting, in the expectation that they would collapse. Once these assets began to implode, the price of the CDS protection rocketed and he was able to profit, without evening having to wait for default to occur.

In the piece, Lewis recounts that

"Eisman called S&P, the ratings agency, and said, Look, I know you are rating these things AAA, and your model says they are AAA, but what happens if real estate prices go down? And the guys says, Actually there is no place in their model to put a negative number. I can't tell you what happens when real estate prices go down."

So much for stress testing.
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