The effects of the housing bubble are well known — it led more or less directly to the collapse of Bear Stearns, Lehman Brothers and AIG, whose toxic portfolio of credit swaps was in significant part composed of the insurance that banks like Goldman bought against their own housing portfolios.

- Matt Taibbi

How was this bubble created?  Remember the four elements:

• An Intangible Market.  Goldman Sachs bundled good and bad mortgages into Collateralized Debt Obligations (CDOs) so that buyers couldn’t figure out what was good and what was bad … and sold them over and over and over again.
• A Broken Rule.  In the only days, mortgage dealers required 10% plus down payments, a steady income and a good credit rating.  These underwriting standards were discarded creating a lot more bad mortgages.
• An Insider.  Robert Rubin, a 26-year alum of Goldman, fought back an effort to regulate derivatives like these CDOs when the head of the Commodity Futures Trading Commission (CFTC) tried to do so.  The CFTC was ultimately stripped of regulatory authority and banks were “free to trade default swaps with impunity.”
• A Hedge.  ”To hedge its own bets, Goldman got companies like AIG to provide insurance – known as credit default swaps – on the CDOs.”  In other words, Goldman Sachs was betting against the CDOs it was selling.

Importantly, please realize that Goldman Sachs was not alone in creating this bubble.