Goldman Sachs Escaped Subprime Collapse by Selling Subprime Bonds Short

Phew! That was close. For a moment there, it looked like the collapse of the subprime mortgage market was going to wipe billions off financial earnings for years to come.

The bad debts were stacked up like poisoned berries gathered by a poison-crazed squirrel during the housing bubble of 2003-2006. Going bad – fast – in summer ‘07, they threatened to wipe out consumers, investors and businesses everywhere in a slow-motion replay of Japan’s “zombie” banking deflation.

At least, that’s how the credit markets saw the subprime meltdown in August. Two subprime hedge funds at Bear Stearns (NYSE: BSC) had gone bust in June; Ben Bernanke, head of the Federal Reserve, said in July that total subprime losses could total $100 billion; private-sector economists put the total nearer to $150 billion. Now MacroMavens in New York thinks we’re looking at $210 billion to $346 billion – “and that’s assuming the situation doesn’t get worse.”

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These billions in bad debt would seep into the broader economy, investors feared, and kill the market in new lending dead.

But hey, panic over!

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