Peering Inside Goldman's Black Box

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One of the stunning things that Goldman Sachs said yesterday was that they had offset losses arising from this summer's credit crunch by shorting mortgages. With hindsight that seems like such an obvious bet that you want to kick yourself for not thinking of it first. But one thing we've been trying to understand is what exactly Goldman means when it says it was "short mortgages" in the third quarter. What asset classes was it shorting?
We can think of a few obvious ways to short mortgages by going short assets that are correlated with the mortgage market. Short the common stock of mortgage companies. Short ABX. Buy protection on correlated bonds. But these are just guesses. We want to know more. How do you think Goldman minted the kind of money they say they did by "shorting mortgages?"

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