Lehman Brothers, which had been in existence since 1844, collapsed in 2008 after its vast trove of mortgage-backed securities and collateralized debt obligations (CDOs) were revealed to contain large amounts of subprime debt. As much as $400 billion of Lehman’s debt was ostensibly covered by credit default swaps, but one of its primary insurers, American Insurance Group (AIG -1.78%) lacked the funds to cover the debt. Because of its size and importance to the global financial system, AIG required a $182 billion federal bailout.
Trillions of dollars in wealth disappeared because of the worst economic downturn since the Great Depression. Fabled investor Warren Buffett lost $3 billion during the crisis, leading him to describe derivatives as "weapons of mass financial destruction."
A few prescient investors, however, wound up with super-sized profits from the debacle. Michael Burry, portrayed by Christian Bale in the movie “The Big Short,” made an estimated $725 million for himself and his investors in Scion Capital with a bet against the subprime mortgage market by purchasing these swaps.
(Burry also would be credited with helping to launch the 2020 GameStop (GME -2.04%) short squeeze, making his firm about $100 million -- although if he had sold shares at the stock’s peak, his profits could have topped $1 billion.)