After returning home, Charles Ledley realizes that he's basically betting that "the end of democratic capitalism" will occur (7.1). Yikes.
Meanwhile, the market isn't doing great. Major subprime companies are failing left and right.
Five days later, a new subprime index called the TABX opens, which gives analysts the ability to see the actual prices of CDOs first time. Shocker: they're way lower than Wall Street estimates.
Prices start tumbling on the TABX immediately. After this, pretty much every bank stops selling credit default swaps except for Wachovia.
Nevertheless, the subprime market quickly goes back to normal, moving billions of dollars' worth of CDOs. Wall Street is artificially propping up prices.
Ledley and Mai are getting pretty scared at this point, so they notify reporters and the SEC. No one takes them seriously.
In June, the CDO division of Bear Stearns announces that it has lost a ton of money in the subprime market. Because Cornwall owns a bunch of credit default swaps from Bear Stearns, this makes them worry that the company will go bust, preventing them from realizing their profits.
Meanwhile, Eisman and company are getting their research game on. They learn about the "floating-rate subprime mortgages" that are at the root of the problem: these loans offer incredible rates for a fixed, two-year period, after which the interest goes up tenfold (7.17).
The guys also learn that the rating agencies don't have any specific information about these loans that can't be found in publicly available sources. Good grief.
By June 2007, the bonds are beginning to decline, and Eisman is finally getting his cash. What he still doesn't know, however, is who's losing money in these deals.
Eisman suspects that the banks and finance firms have been investing in CDOs themselves, a suspicion that is confirmed when HSBC announces that it too has lost a bunch of money in the subprime market. That only jacks up the consequences of a crash further.
As the market starts to go mad, Eisman reads an article by an economic forecaster named Jim Grant talking about the failure of rating agencies in the subprime market.
When Eisman finishes, he pretty much has "an orgasm" (7.35).