If you really don't understand what happened back in 2008 when the world of finance collapsed, have a go at Michael Lewis' book, The Big Short. He has found the few people who actually made a profit as the rest of the world was in shreds. How did they do it? Credit Default Swaps. You've heard the term, now listen to what they are and what they do.
The big problem with the banks, etc in '08 and long before was their investment in subprime mortgages. We knew that, but what we didn't know is that one clever fellow took a whole mess of those mortgages — no one knows how many or from what source — bundled them up, called them Collateralized Debt Obligations and sold them on the bond market. When the even more clever (and well west of left field) fellows saw what he had done, they wanted to bet against the CDO's survival. They did this by buying what effectively is an insurance policy, now called a Credit Default Swap. Most of those were written by AIG and when the bottom fell out, guess who had to pay?
AIG wasn't the only one dragged down, Lehman, Merrill Lynch, RBS among others. I give Lewis a lot of credit: he explains that no one ever really knew, nor knows now, which instruments exactly are in a CDO. Those who really raked it in also shorted the backers of the Credit Default Swaps. You do have to have a high degree of lunacy to get into this, but oh my, the winnings are awfully nice!
Michael Lewis has been in the financial world for twenty years, and he is so good at explaining things because he, too, was thrown into the field with no background or knowledge of finance. That seems to be the leading peculiarity of those who end up making obscene amounts of money. The fact that almost no one working in the bond market really understands what was going on helps us, not so much to comprehend, but to accept that we may never know.
He gives us a very good hint at the makings of CDS’s and CDO's, and that's a start. What we really understand now is that there are people out there who can devise the most diabolical forms of investment imaginable and profit from them. Even Michael Lewis can’t deliver an “aha moment” on this one.