You find an algorithm that is very reliable for forecasting the near-term prices of an asset. Your algorithm only works in contemporary, or at least recent, markets. You notice that by building a basket of many assets, you can increase your leverage as you have a reduced the volatility of returns. You DO UNDERSTAND that there is a possibility of major failure, but you assign it a low probability and decide to let it ride for the time being. After all, after a certain level of profit, you can scale back the risk. The profits are too good, so you never scale back. Thus, you are the one standing when the music stops.
If you just come up with an algorithm that mostly says 'buy', then you can look good for as long as a secular bull market lasts. And if your algorithm sounds amazing, then you can get lots of leverage without otherwise doing anything.
Of course, this story ends the same way, you're left standing when the music stops (along with most of Wall Street) - but with luck, the Fed will buy your toxic assets...
Not sure what you mean but while Lehman might indeed have been the most clueless Wall Street house and thus the obvious one to fail, we have to remember the whole edifice would have collapsed if not for the Fed. IE, Goldman would be bankrupt too if AIG hadn't been supported by the Fed but the sequence "Kill Lehman, prop up AIG" just happened to make Goldman look good. Coincidence? Who can say but while all the houses had influence, the Treasury Secretary just happened to be...
Remember, "Left standing when the music stops" is an expression from musical chairs. It means the opposite - you will not be left standing...
You find an algorithm that is very reliable for forecasting the near-term prices of an asset. Your algorithm only works in contemporary, or at least recent, markets. You notice that by building a basket of many assets, you can increase your leverage as you have a reduced the volatility of returns. You DO UNDERSTAND that there is a possibility of major failure, but you assign it a low probability and decide to let it ride for the time being. After all, after a certain level of profit, you can scale back the risk. The profits are too good, so you never scale back. Thus, you are the one standing when the music stops.
The end.