In the late 1930s and early ’40s, a middling Dutch painter of old-fashioned taste, Han van Meegeren, made several pictures in the style of Vermeer (1632-75), with the object of passing them off as originals. It was a smart choice — only a tiny number of Vermeers (three dozen) were thought to exist, and the passion among collectors to own one was intense. But still, why should any artist want to hide his own name and talent behind that of another? Why, that is, become a forger? These are questions Edward Dolnick tries to answer in “The Forger’s Spell.”

Van Meegeren, Dolnick suggests, was motivated quite simply by the prospect of making money. Later on, after he was unmasked, he offered other explanations — principally, a desire to revenge himself on art critics who had scorned the pictures he made in his own style. His critics did not share his own high opinion of his work; they thought he possessed the talent of a magazine illustrator. He had, Dolnick says, “a taste for the cloyingly sweet or the creepily erotic,” hardly the basis for the making of masterpieces.

But while “Van Meegerens” flopped, his forgeries met with immense success. They fooled practically all the Vermeer experts and sold for gigantic sums: in total, about $30 million in today’s money. And notably, among his gullible customers was Hitler’s deputy, Hermann Goering.

For seven years, between 1938 and 1945, van Meegeren’s principal forgery, “Christ at Emmaus,” was more famous than any original Vermeer. The fact that it was a fake was discovered by an odd turn of events. After the war, van Meegeren was investigated by the police for the hugely serious crime of disposing of priceless Vermeers to the Nazis. To defend himself against the charge, he admitted to the offense of forgery — and painted another fake while in police captivity, just to prove it. Far from collaborating with Holland’s invaders, he had hoodwinked one of their leaders, he insisted, thus casting himself as a somewhat unusual hero, the perpetrator of an unconventional kind of economic warfare against the Third Reich. Goering had boasted, “I intend to plunder, and to do it thoroughly.” Who in Holland could object to the plundering of a plunderer?

Yet while the truth saved van Meegeren from a conviction for treason, which carried the death penalty, it did not save him from a conviction for fraud. He was given a one-year jail sentence but died of heart disease, at age 58, before he was able to serve any time. He became known as “the man who swindled Goering.”

Dolnick, the author of “The Rescue Artist,” about the theft of Edvard Munch’s painting “The Scream,” tells his story engagingly and with a light touch. He has a novelist’s talent for characterization, and he raises fascinating questions. How, for instance, could the forgeries have fooled anyone? (Dolnick says that van Meegeren was “perhaps the only forger whose most famous works a layman would immediately identify as fake.”) How do forgers set about doing their work? One chapter is titled “Forgery 101”; it contains instructions from which any prospective forger would benefit. And why does our estimation of a work of art change when we discover it is a fake?

Forgery is interesting in part because it demands great, if imitative, skill, and in part because copying itself has become a significant aspect of contemporary art-making. It is an art-crime that encourages reflections on the nature of art itself. This book is an aid to such reflections.

The story of the ABS fund’s demise began last year when Peloton took short positions on investments backed by pools of subprime mortgages, meaning it bet that their values would fall. While other hedge funds like Paulson & Co. also bet short on mortgage bonds, Peloton did something more complicated: It wagered that slices of the same bond portfolio with different ratings would diverge sharply in price – a strategy known as capital structure arbitrage.

For instance, the fund was long on AAA-rated mortgage bonds and gambled that BBB-rated subprime bonds would fall in value. That calculation paid off big when, according to ABS investors who spoke to Fortune.com on the condition of anonymity, the fund’s short position fell 75 percent, from an average of nearly $100 to $25. Meanwhile, the price of the fund’s AAA-rated long position declined much less.

The price differential between the short and long positions led to the 87 percent return. Trade publication EuroHedge Magazine subsequently named the Peloton ABS fund as 2007′s best fixed-income fund.

“Everything changed this year.”

The fund had about $16 billion in long positions versus $3.2 billion in shorts, according to a hedge fund manager who has seen Peloton’s portfolio. The short positions – which were so profitable in 2007 – declined modestly in value, while the credit crisis drove the value of the massive long positions down an average of between $15 and $25 per bond in about a month. The fund suffered massive losses as a result.

What’s worse, the fund’s investment bank creditors – whose balance sheets have been brutalized in the credit crisis – did not have the resources to absorb the hit on behalf of the fund and demanded additional collateral. Peloton was unable to meet those demands.

In turn, a consortium of Peloton’s lenders – its prime broker Goldman Sachs, Citadel Group and Och-Ziff Capital Management – declined to buy the portfolio. Grant and Beller are now trying to sell pieces of Peloton’s portfolio, according to U.S.-based mortgage hedge fund managers who have been approached.

Quantitative funds have been devastated by the market volatility that began last summer. At one point in July, the AQR Absolute Return fund booked a 13 percent loss. While it recouped about half of that loss later in the month, the fund’s once-resilient mathematical models were no match in the face of a global credit crunch, the severity of which few predicted.

Worse for AQR, the firm could now see its star employees head for the exits. That’s because of a peculiarity of hedge fund management called the “high-water mark,” in which a fund manager must recoup the amount of prior losses before earning the lucrative 20 percent and higher performance fees. AQR’s rank-and-file traders and analysts now have little incentive to stick around – unless, of course, the fund’s owners guarantee them compensation from a cut of their fees.

Yet another potential blow: Banks and brokerages that provide hedge funds with the leverage they need via loans and lines of credit traditionally could begin to curtail or charge more for these borrowings when double-digit losses are posted.

Brian Hunter brought down Amaranth with disastrous trades on gas. He is accused of manipulating the markets. He has been called the ‘destroyer of all worlds.’ But is he such a bad guy?

SOUTH KOREA’S judiciary is notoriously easy on white-collar crime. The higher up the errant corporate chieftain, the more likely his prison sentence will be suspended for the good of the nation’s economy—especially if he hands over a portion of his wealth to charity. On April 17th, when prosecutors charged Lee Kun-hee, the chairman of Samsung, with tax evasion and breach of trust, but cleared him of allegations of bribery, the outcome was widely seen as a whitewash. “Many Koreans must feel they have just watched a farce,” declared the Chosun Daily, a conservative newspaper.

Phillip Bennett, the former boss of Refco, received a 16-year jail sentence for defrauding investors. Once one of the world’s top futures and commodities brokers, Refco collapsed in October 2005 when details of the fraud emerged, sending ripples through the world’s financial centres.

The business of assigning a rating to a mortgage security is a complicated affair, and Moody’s recently was willing to walk me through an actual mortgage-backed security step by step. I was led down a carpeted hallway to a well-appointed conference room to meet with three specialists in mortgage-backed paper. Moody’s was fair-minded in choosing an example; the case they showed me, which they masked with the name ”Subprime XYZ,” was a pool of 2,393 mortgages with a total face value of $430 million.

Subprime XYZ typified the exuberance of the age. All the mortgages in the pool were subprime — that is, they had been extended to borrowers with checkered credit histories. In an earlier era, such people would have been restricted from borrowing more than 75 percent or so of the value of their homes, but during the great bubble, no such limits applied.

Moody’s did not have access to the individual loan files, much less did it communicate with the borrowers or try to verify the information they provided in their loan applications. ”We aren’t loan officers,” Claire Robinson, a 20-year veteran who is in charge of asset-backed finance for Moody’s, told me. ”Our expertise is as statisticians on an aggregate basis. We want to know, of 1,000 individuals, based on historical performance, what percent will pay their loans?”

The loans in Subprime XYZ were issued in early spring 2006 — what would turn out to be the peak of the boom. They were originated by a West Coast company that Moody’s identified as a ”nonbank lender.” Traditionally, people have gotten their mortgages from banks, but in recent years, new types of lenders peddling sexier products grabbed an increasing share of the market. This particular lender took the loans it made to a New York investment bank; the bank designed an investment vehicle and brought the package to Moody’s.

Moody’s assigned an analyst to evaluate the package, subject to review by a committee. The investment bank provided an enormous spreadsheet chock with data on the borrowers’ credit histories and much else that might, at very least, have given Moody’s pause. Three-quarters of the borrowers had adjustable-rate mortgages, or ARMs — ”teaser” loans on which the interest rate could be raised in short order. Since subprime borrowers cannot afford higher rates, they would need to refinance soon. This is a classic sign of a bubble — lending on the belief, or the hope, that new money will bail out the old.

Moody’s learned that almost half of these borrowers — 43 percent — did not provide written verification of their incomes. The data also showed that 12 percent of the mortgages were for properties in Southern California, including a half-percent in a single ZIP code, in Riverside. That suggested a risky degree of concentration.

On the plus side, Moody’s noted, 94 percent of those borrowers with adjustable-rate loans said their mortgages were for primary residences. ”That was a comfort feeling,” Robinson said. Historically, people have been slow to abandon their primary homes. When you get into a crunch, she added, ”You’ll give up your ski chalet first.”

Another factor giving Moody’s comfort was that all of the ARM loans in the pool were first mortgages (as distinct from, say, home-equity loans). Nearly half of the borrowers, however, took out a simultaneous second loan. Most often, their two loans added up to all of their property’s presumed resale value, which meant the borrowers had not a cent of equity.

In the frenetic, deal-happy climate of 2006, the Moody’s analyst had only a single day to process the credit data from the bank. The analyst wasn’t evaluating the mortgages but, rather, the bonds issued by the investment vehicle created to house them. A so-called special-purpose vehicle — a ghost corporation with no people or furniture and no assets either until the deal was struck — would purchase the mortgages. Thereafter, monthly payments from the homeowners would go to the S.P.V. The S.P.V. would finance itself by selling bonds. The question for Moody’s was whether the inflow of mortgage checks would cover the outgoing payments to bondholders. From the investment bank’s point of view, the key to the deal was obtaining a triple-A rating — without which the deal wouldn’t be profitable. That a vehicle backed by subprime mortgages could borrow at triple-A rates seems like a trick of finance. ”People say, ‘How can you create triple-A out of B-rated paper?’ ” notes Arturo Cifuentes, a former Moody’s credit analyst who now designs credit instruments. It may seem like a scam, but it’s not.

The secret sauce is that the S.P.V. would float 12 classes of bonds, from triple-A to a lowly Ba1. The highest-rated bonds would have first priority on the cash received from mortgage holders until they were fully paid, then the next tier of bonds, then the next and so on. The bonds at the bottom of the pile got the highest interest rate, but if homeowners defaulted, they would absorb the first losses.

It was this segregation of payments that protected the bonds at the top of the structure and enabled Moody’s to classify them as triple-A. Imagine a seaside condo beset by flooding: just as the penthouse will not get wet until the lower floors are thoroughly soaked, so the triple-A bonds would not lose a dime unless the lower credits were wiped out.

Structured finance, of which this deal is typical, is both clever and useful; in the housing industry it has greatly expanded the pool of credit. But in extreme conditions, it can fail. The old-fashioned corner banker used his instincts, as well as his pencil, to apportion credit; modern finance is formulaic. However elegant its models, forecasting the behavior of 2,393 mortgage holders is an uncertain business. ”Everyone assumed the credit agencies knew what they were doing,” says Joseph Mason, a credit expert at Drexel University. ”A structural engineer can predict what load a steel support will bear; in financial engineering we can’t predict as well.”

Mortgage-backed securities like those in Subprime XYZ were not the terminus of the great mortgage machine. They were, in fact, building blocks for even more esoteric vehicles known as collateralized debt obligations, or C.D.O.’s. C.D.O.’s were financed with similar ladders of bonds, from triple-A on down, and the credit-rating agencies’ role was just as central. The difference is that XYZ was a first-order derivative — its assets included real mortgages owned by actual homeowners. C.D.O.’s were a step removed — instead of buying mortgages, they bought bonds that were backed by mortgages, like the bonds issued by Subprime XYZ. (It is painful to consider, but there were also third-order instruments, known as C.D.O.’s squared, which bought bonds issued by other C.D.O.’s.)

Miscalculations that were damaging at the level of Subprime XYZ were devastating at the C.D.O. level. Just as bad weather will cause more serious delays to travelers with multiple flights, so, if the underlying mortgage bonds were misrated, the trouble was compounded in the case of the C.D.O.’s that purchased them.

Moody’s used statistical models to assess C.D.O.’s; it relied on historical patterns of default. This assumed that the past would remain relevant in an era in which the mortgage industry was morphing into a wildly speculative business. The complexity of C.D.O.’s undermined the process as well. Jamie Dimon, the chief executive of JPMorgan Chase, which recently scooped up the mortally wounded Bear Stearns, says, ”There was a large failure of common sense” by rating agencies and also by banks like his. ”Very complex securities shouldn’t have been rated as if they were easy-to-value bonds.”

Bryan Burrough, the co-author of Barbarians at the Gate, wrote about the rumor bringing down Bear Stearns in Vanity Fair (August 2008)

On Monday, March 10, the rumor started: Bear Stearns was having liquidity problems. In fact, the maverick investment bank had around $18 billion in cash reserves. But soon the speculation created its own reality, and the race was on to keep Bear’s crisis from ravaging Wall Street. With the blow-by-blow from insiders, Bryan Burrough follows the players—Bear’s stunned executives, trigger-happy reporters at CNBC, a nervous Fed, a shadowy group of short-sellers—in what some believe was the greatest financial scandal in history.