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Sages and Fools
The entirety of human interaction fits under just three umbrellas. In the first, bothparties emerge from the rubble worse than before; the perpetrator of a murder gets lifein prison and the victim's day is ruined, so to speak. In the second, everybody wins;I'm terrible at cooking and you're abysmal at housework, so you make us pizza while I05attack the fungus under your couch. And as for the third, well, a cynic will say that thisis by far the largest umbrella—if it were a pie chart, we're talking everything but theà la mode. We call this interaction category the zerosum, because anything gainedmust come at the loss of another. Put another way, your tragedy is my windfall.Welcome to the New Wall Street.10Poker players are fond of saying that if you look around the table and can't spotthe fool, run away as fast as you can; you're it. The same goes for the world of finance,which has quickly become as adversarial as a duel at high noon. Such is the nature ofequities, futures, bonds, and derivatives (to name a few): any transaction has both awinner and a loser. Either the buyer has purchased an instrument that is undervalued15and will be worth more tomorrow, or the seller has unloaded a bloated instrument thatwill fall back closer to its "true" market valuation in the near future. Either way, dollars(both unrealized and actual) will flow from one pocket to another.Thus, within such a contentious system, it is to the advantage of all participantsto trade with the fool. And, if the fool can't be readily found, trust that one will be20enticed. Leading up to the Crash of 2008, fools were aplenty as wild speculation wasthe flavor du jour and sound financial theory was disregarded. Nowhere was thisact of leapingbeforeyoulook as flagrant as in the mortgage industry, where loanswere repeatedly and systematically extended to Americans with little to no chanceof repaying the interest, let alone the initial capital. Known as "subprime," high-risk25borrowers with poor credit scores were extended money at interest rates far abovepar. The banks' deluded thought process behind this was that the interest rates wereso high that, even if an inordinately large percentage of the borrowers defaulted, hugeprofits were still guaranteed. Besides, worse comes to worst, the bank still owns thehouse. It was a foolproof plan.30Until it wasn't. The housing bubble had finally burst. It wasn't just that a few peopledefaulted; rather, foreclosures were everywhere you looked. And, even worse, whenthe banks came by to collect the keys, the houses were now worth only fractions ofwhat the banks lent for them. Consequently, they lost billions.Here's the kicker: while the American financial system nearly collapsed, some had35seen the fool coming from miles away, secretly cheering with each misstep by the savingsand loan industry. So, while the guardians of the money boxes continued speculatingon what they thought to be diamonds, a small handful on the fringes knew thatit was nothing but coal. And they profited spectacularly.Through a convoluted, abstruse instrument known as a "credit default swap," these40sages were able to make fortunes off of the mortgage implosions, laughing all the wayto the bank (where nobody else most certainly was laughing). It was an adroit play bythe sages, recognizing an obscure opportunity and capitalizing on the perfect storm.But, such were the just deserts of each party, and such is the black and white duality ofthe system. One is destined to lose his shirt, and another expands his wardrobe.
1. Which choice best summarizes the passage?
2. The narrator indicates that banks and lenders thought subprime loans would end up profitable because
3. Which choice provides the best evidence for the answer to the previous question?
4. As used in line 15, the word "bloated" most closely means
5. According to the paragraph in lines 18-29, what factors contributed to the Crash of 2008?
6. In line 30 "The housing bubble had finally burst" means what happened?
7. In line 36, "guardians of the money boxes" most nearly refers to
8. As used in line 39, the word "abstruse" most closely means
9. The narrator would agree that all of the following are examples of "zerosum" EXCEPT
10. Which choice provides the best evidence for the answer to the previous question?
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