It’s probably not important that you know any of this anymore, or anyway, at least to the extent that there’s absolutely nothing you can ever do about it. What was done was started decades ago and blew up five years ago and fizzled and went away mostly without most of us knowing or understanding how it happened, but as with all things, there’s a lesson to be learned for those of us who can only really ever hope to take lessons away from these things, while the perpetrators take everything of actual value. In other words, while IronMikeGallego swims around in a pool of cash, lighting cigars made of shredded cash wrapped in cash with burning cash and then putting them out in ash-trays made of papier-mache cash, the rest of us can tell ourselves how we won’t let it happen again.
We’re talking, of course, about the synthetic subprime-backed collateralized debt obligation. The synthetic CDO: the jerry-rigged crank with which a small group of investors powered the subprime mortgage machine and, by extension, the housing bubble, well beyond the boundaries of reason and logic.
Here comes the part where we recap what you already know: a mortgage is a loan from a bank used to purchase a home. In exchange for the bank financing the purchase, you agree to pay back the loan with interest over a certain period of time. The interest rate and the length of the loan are determined by calculating the borrower’s credit-worthiness: if the bank decides you’re a responsible person with reliable income, they will see the loan as a low-risk investment, and will offer you a lower interest rate for the opportunity to add a low-risk investment to their portfolio. Because your loan is rated as “low-risk”, it is used as a steady revenue stream to protect the bank from greater risks it takes with other investments. The bank takes a steady income from the monthly interest payments it receives from all its low-risk mortgages.
For a long time, Savings and Loans institutions (S&Ls) made their money this way: they paid a small-but-dependable interest rate to long-term account holders for banking with them, then they used the money deposited in those accounts to make low-risk loans to responsible people with reliable income at interest rates only slightly higher than those paid to the account holders. The difference between the interest collected from the low-risk loans and the interest paid to long-term account holders was the profit. So, a hundred people put $10,000 each in a long-term savings account earning (let’s say) 2% interest. The bank then uses some of that money to make low-risk home loans to a few borrowers at 5% interest. The bank collects the monthly interest payments on the home loans and uses that money to make the smaller interest payments to its account holders, and pockets the rest. It’s a tidy little low-risk business.
Somewhere along the line, other investors decided they wanted a slice of that action. Here’s a low-risk investment that will steadily pay interest every month for 30 years. These low-risk investments have value even to those investors who don’t want to do the long work of establishing a facility, building a roster of long-term account-holders, and verifying the credit-worthiness of borrowers. These investors want to buy their way into that transaction and start collecting some of that interest.
In order to understand how that works, we’re going to have to do some math. A $300,000 home loan with 5% interest first of all will buy you roughly jack-shit these days, but more to the point, over its full 30-year term will wind up being worth about $580,000, because you, the borrower, will pay back the $300,000 in principal and another $279,000 or so in total interest. To cut in on that transaction and purchase it away from the lender, investors don’t need to pay the actual worth of the loan, they just need to pay off the principal and add in some profit. The benefit to the investor is the difference between the profit they pay the lender and the interest they collect over the full term of the contract. So, they pay our lender $400,000 for the contract on a $300,000 loan with 5% interest, the lender makes $100,000 in profit on the loan, and the investor banks on a nice low-risk long-term profit of about $180,000 spread over the life of the loan.
There’s more benefit here, of course: the lender gets to remove the risk, however low, from his books. Even if he’s being responsible in his lending, there’s still a small chance that the homeowner will get laid off and lose his income and default on the loan, depriving the lender of all the profit associated with the loan and leaving the lender with an empty, unwanted foreclosed home in his possession, which he must sell to recoup his costs. If collecting 30 years of interest payments on a responsible home loan is a low-risk investment of $300,000, selling that loan off to an investor and making an immediate $100,000 is zero-risk.
And so, along with S&Ls and big banks, originate-and-sell operations came along. An originate-and-sell business has no interest in collecting 30 years of interest payments, nor are they interested in attracting savings account holders to finance their loans. They do one thing: make home loans to sell to the secondary market. Now, this can be done responsibly even without the pressure of securing the long-term savings of account holders, but by removing themselves from the business of holding onto loans made to home-owners, they’ve removed the risk from the lending business. As they see it, this is ridiculously easy money. They loan money to a borrower, then turn immediately around and sell the loan for a profit to the marketplace. No risk, immediate profit.
Now, another important development has taken place downstream in the marketplace, bolstering the originate-and-sell model of business: large banks are buying up individual mortgages from S&Ls and O&Ss (what the hell), packaging them up in huge bundles of loans, and selling them off as bonds. This makes sense, as it takes what would be seen as an infinitesimally small and insignificant investment (a single home loan) for a big investment firm or hedge fund, and groups it into a bond with enough other loans to put it in the appropriate scale for major investors. So, instead of buying a single puny loan on a condo in Milwaukee, worth almost nothing to a fund dealing in billions of dollars, the big bank buys a bond containing thousands of individual loans that collectively pay tens of millions of dollars in low-risk profit. A bond is just a way to move thousands and thousands of home loans as a single unit, paying the kind of profit that registers with major investors.
Such a bond is also a convenient place to hide a somewhat riskier loan. Remember, not everyone in the home-buying marketplace is equally credit-worthy. An S&L that keeps the mortgage on its books and uses it to finance the interest owed to account holders might see your particular purchase as a bit riskier than mine: maybe you’ve been in your current job for only one year, or maybe your mortgage requires both you and your spouse’s income, or maybe you’re buying an investment property you don’t intend to occupy. So, the lender charges you more interest because there’s more risk. This is normally done within reason: the lender needs the interest to finance its business with account holders, and so it can’t take on too much risk of default.
But a large group of loans can still be seen as a safe investment even if it carries a small handful of somewhat risky loans: most of those mortgages were made to responsible borrowers with reliable income, and the interest collected from the majority of them will more than cover any potential losses from the few risky loans in the group. This is how a bond works: the bond is given a rating that describes its overall risk, and its sale price is determined by that rating. A bond that overwhelmingly contains low-risk (and therefore low-interest) loans might sell for top-dollar among risk-averse investors, whereas even a bond that contained nothing but risky loans made to less-than-ideal borrowers still has some value because it bears a higher interest rate. Most bonds generally fell somewhere on the low-risk end of that spectrum, but it’s important also to understand that a few medium-risk loans in an otherwise low-risk bond are seen as desirable: remember, those loans aren’t sure to default, they just carry a greater risk of default, and in the meantime, they’re paying a higher interest rate than the low-risk loans. And because the profit from the low-risk loans will cover the losses from the few defaults, it’s good for the investor to collect a higher interest rate while those loans are still active.
At street level, the sale of mortgage-backed bonds was a major boon to the business of lenders: now, instead of just making responsible low-risk loans to responsible borrowers with reliable income, they could make a certain number of riskier loans to less credit-worthy borrowers and still sell them off to the marketplace so long as the increased risk was reflected in the interest rate. Not only that, but as we’ve seen, higher interest-bearing so-called subprime (less than ideal) mortgages could even be seen as good within a bond dominated by low-risk mortgages. A market now existed specifically for subprime mortgages, thereby removing the risk from even these traditionally riskier loans.
Of course, making such loans requires finding people willing to borrow large sums of money at interest rates much higher than standard rates, and that’s not as easy. Somewhere between your ideal credit candidates and the unhinged transient crazies who work down at the yard shoveling cats for a living, there’s a group of mostly responsible people with mostly reliable income who have traditionally exercised the appropriate amount of caution with regard to borrowing huge sums of money. Recent college graduates and middle-managers and white-collar singles and organized, hard-working low- and middle- income families who rent because they don’t think of themselves as homeowners and see their current financial status as transitory or plan on moving across the country in a year. The trick, for lenders, is appropriately evaluating the risk of lending to these individuals, and then convincing them to enter the marketplace.
Luckily, right around the time originate-and-sell lenders were realizing there wasn’t any longer any reason to worry about the risks associated with lending to any group of borrowers, so long as the volume of subprime loans was held in moderation, Alan Greenspan took it upon himself to drive interest rates down as low as possible. Now we have low-risk borrowers buying homes at historically low interest rates, and subprime borrowers paying relatively higher rates that were still tempting. The effect of this was an awful lot of home-buying, and this demand for homes drove the price of homes ever upward. The message being explicitly sent to otherwise reluctant borrowers was that buying real-estate was now no longer just for families or the rooted or the wealthy: buying real-estate was now the way to join the wealthy: Purchase a home as an investment, hold onto it long enough to see its value increase, and sell it at a profit. This steady increase in home values across the country effectively removed the risk from the borrowing side of the mortgage contract in much the same way mortgage-backed bond-making removed the risk from the lending side. The purchase of a home in America via credit was now seen as a risk-free transaction from all sides. As expected, whole new demographics of borrowers rushed into the marketplace. This infusion of new home-buyers encouraged the value of homes ever upward.
Another important development happened at the other end of the boom: investors fell in love with mortgage-backed bonds. Home prices were rising, homeowners were gaining wealth, billions and billions of dollars were changing hands in the market, innumerable new mortgages were entering the marketplace every day, and mortgage-backed bond-trading became the dominant transaction between banks and investors. Guided by the traditional understanding of home loans – that they were low-risk, long-term investments that paid monthly interest like clockwork – investors sought to soak up as much of this new wave of mortgage-backed bonds as possible, failing to account for new realities: homes were no longer necessarily being purchased primarily as long-term residences, but as short-term investments; and the influx of investors was made up of borrowers that would normally be seen as subprime, who’d been coaxed into the market by the reality that home loans were cheap and the notion that home prices would rise consistently and dramatically for as long as anyone could foresee. In other words, a bond full of home mortgages might have once contained nothing but steadily employed, fiscally responsible borrowers, but now it contained a growing and unaccounted-for percentage of borrowers who had no intention of spending 30 years paying off the loan. The mortgage business had become a short-term cash-grab both for the borrower and the originate-and-sell lender, but bond buyers were still treating the accompanying loans as a smart, low-risk, long-term investment on par with a Treasury Bond.
This active, robust market for mortgage-backed bonds created not only an incentive for originate-and-sell lenders to make more home loans, but to make more subprime home loans. The fundamental misunderstanding in the bond marketplace about the nature of the growth in housing demand meant that all loans were still seen as long-term investments, both by the investor and the borrower, and safe, low-risk home loans with higher interest rates were understood to be even better. This had an odd, if not unforeseeable, effect on lending: instead of simply loosening the criteria for making a “prime” home loan and growing the percentage of “prime” loans, lenders actually tightened those criteria, shrank the number of “prime” mortgages, and expanded the volume of subprime mortgages. This makes sense, in an insane, only-in-capitalism kind of way: if the market for subprime mortgages is as robust as the market for prime mortgages, eventually it will be good business to take people who would normally qualify for the best mortgage at the lowest interest rate and put them into a trickier mortgage at a higher rate. After all, now you’ve taken a responsible borrower with reliable income and gotten them to pay you a higher interest rate for what they could otherwise have at a low interest rate. This might have taken some doing under normal circumstances, but the crush of buyers, rapid sale of homes, and constant increase in home values in the market created a frenzy among borrowers that gave lenders a dangerous upper hand.
These risky terms went beyond higher interest rates: adjustable interest rates became the norm among subprime mortgages, where the negotiated interest rate at the time of purchase was only guaranteed for a short period of time, after which it would float upward in a pattern only vaguely related to federal interest rates. The negotiated rate was, in effect, a teaser, designed to get the borrower into the loan so that the loan could be ratified and sold. Within five years, the rate would explode upward to reflect the borrower’s subprime status, by which time the mortgage would be comfortably packaged in a bond in the hands of an investor and as far as possible from the portfolio of the loan originating lender. PMI, or mortgage insurance, also became a norm: PMI is a regular payment tacked onto your monthly principal and interest payments that somehow “guarantees” your mortgage (as if the home itself didn’t serve as adequate collateral). PMI is a clever way for lenders to hide more fees and interest onto your loan while still advertising a low interest rate. That these features managed to become standardized on loans made to otherwise credit-worthy borrowers illustrates the degree to which lenders were both creatively luring new borrowers into the market and simultaneously making those mortgages more attractive on the secondary market when sold in bonds.
Now both the mortgage-lending business and the valuation of real-estate were essentially broken, if for no other reason than the particular way they’d become interdependent. As long as home prices continued skyrocketing, potential buyers would continue to see home-buying not as a long-term investment in one’s family and shelter, but as a way to quickly make a lot of money. And as long as investors purchased mortgage-backed bonds, there would be incentive for lenders to put more and more borrowers into the pipeline. And as long as lenders continued offering mortgages to less than ideal candidates, the demand for housing would continue to grow and push ahead of it the prices for homes. The two problems, of course, were the questions of what happened if home prices stopped climbing, and what happened if investors noticed that all these new mortgages weren’t the safe, low-risk investments they’d traditionally been. Either of those scenarios would create even more danger in the market than what was already happening: a full-blown housing bubble.
See, it’s important to remember that by now houses were being purchased by-and-large as investments and not as homes. Whether the purchasers were living in them or not, the primary incentive for purchasing the home was the expectation that the home’s price would always rise, keeping the purchaser safe from financial hardship. If the borrower got into significant debt, they could refinance their now-more-valuable-than-ever home and use the equity to pay off credit card debt or a vehicle or a boat or another investment property. A home equity loan could be used to start a new business or purchase a dream car. A home could be sold after a few years at a tremendous profit, which would then be used as down payment on an even bigger home with an even riskier loan. But if the value of the home stayed flat, the volume of real-estate investors stood to decrease, and the opportunity to sell one’s home at all, let alone at the expected profit, would suddenly go away. It’s easy to see how calamity depended not upon housing prices declining, but on housing prices simply leveling off.
Of course, long before that happened, the market answered the second question: what happens if investors notice that all these new mortgages aren’t the safe, low-risk investments they’d traditionally been? Investors noticed. Or, rather, small groups of investors got wise while the majority of investors busied themselves buying up mortgage-backed bonds as hungrily as ever. And in order to take advantage of their newfound wisdom, these investors put to use an arcane derivative of their own: the credit-default swap.
The credit-default swap (CDS) is a tricky little investment often referred to as insurance when it is in fact a wager. Here’s how it works . . . well, okay, here’s how insurance works: you own something at risk. In order to insure its value against loss, you purchase insurance: you agree to pay into a fund for protection, and in return that fund agrees to pay you the value of your investment if it is lost. So, you pay GEICO a regular sum of money to insure your car. If your car is totaled, GEICO pays you the current value of your car. Via this agreement you’ve purchased insurance and GEICO has sold insurance. Now, here’s where it gets confusing: in a credit-default swap, either side can purchase the insurance and either side can sell it. So, GEICO could call you and say “hey, you’ve got that nice car out there, and you take good care of it, but I think your neighborhood is unsafe and I’m pretty sure your car is gonna get wrecked sooner or later, so I’d like to buy from you some insurance.” This really happens. It’s a wager: the purchaser is betting the seller that something bad is going to happen to the investment, and it doesn’t matter which side actually owns the investment. Both sides enter into the agreement as an expression of their confidence in the investment. The owner of the investment can purchase a CDS from another investor if he wants to protect himself from a risky investment, or he can sell a CDS on that same investment if he thinks someone is wildly overrating the risk of the investment.
Those first few investors who got wise to the notion that subprime mortgage-back bonds were trouble wanted to buy CDSs from the banks who invested in the bonds. Imagine calling an investment bank and saying “I want to pay you a percentage of the value of a particular bond every month for the entire 30-year life of the bond, but if the mortgages in that bond default, you will have to pay me the entire value of the whole bond.” That’s essentially what took place, and it took some serious convincing. First of all, it’s arcane and backwards, and second of all, the notion that these bonds were in any way risky was unheard of, but most importantly, this was a tricky new business that seemed unwieldy and unnecessary to what was then seen as a robust and healthy business in subprime mortgage-backed bond-trading. But, if a bank or investor subscribes to the notion that a subprime mortgage-backed bond is the end-all of low-risk investments, it shouldn’t take too long for that same bank or investor to agree to be on the receive-even-more-money-every-month end of a CDS. After all, the only circumstance wherein they’d ever have to pay the purchaser of the insurance any money involved an unheard of rate of default among the underlying mortgages backing the bond, and these were safe investments. Sure, I’ll take your money! Now, because banks and investors could sell CDSs on their safe investments and thereby collect even more monthly payments, subprime mortgage-backed bonds became even more attractive.
Further up the bond supply line, bond-makers were looking for creative solutions to a new reality of their business: originators were creating subprime mortgages at such a volume that they couldn’t all be tucked into otherwise low-risk bonds: after all the low-risk mortgages had been packaged into highly rated bonds and medium-risk loans had been packaged into mid-rated bonds, there was still a difficult-to-sell and objectively risky-as-hell pile of shitty mortgages lying on their books. By this time, lenders had begun scraping the very bottom of the credit barrel for new borrowers: migrant workers and the unemployed and the massively-in-debt, and these loans, too, had to be delivered to the secondary market. The challenge therefore fell to bond-makers to somehow turn this junk into an attractive investment, and this is where we meet the CDO, the collateralized debt obligation.
A CDO is a fairly bizarre security that makes rather ingenious use of the garbage juice and detritus left at the bottom of a pool of loans after they’ve all been packaged and sold as bonds. Everything that remains is packaged into a single bond, called a CDO. The owner of the CDO then basically sells memberships to other investors. Those that buy into the top tier, or “tranche”, of the CDO are in a relatively safe situation: they buy in at a certain cost, and for that investment they earn a percentage of all the mortgage payments collected from the underlying home loans. Those that buy into the middle tranches pay less for their investment, and they collect a higher percentage of all the mortgage payments from the underlying loans, but if the mortgage payments aren’t made or the loans default, they’re booted from the CDO before the top tier. And those that buy into the lower tranches are pissing their money away. They pay significantly less to buy in, and they stand to make a lot of money if the CDO collects 100% of the mortgage payments from the underlying loans, but they’ll be the first investors dropped if any of the underlying loans default. And because many of these subprime mortgages included truly ridiculous incentives to lure borrowers into the market, like pay-options that give the borrower permission to not pay their mortgage when they don’t feel like it, the lower tranche folks were more or less screwed. It’s a high-risk, high-reward investment, to say the least. A CDO sort of operates on the understanding that this particular collection of mortgages is unlikely to regularly deliver 100% of its underlying payments, but offers an opportunity to still buy into the transaction at different levels of risk.
It fell to ratings agencies like Moody’s and the S&P to look at each individual CDO (and there were thousands and thousands), determine its value based upon the risk of the underlying loans and the distribution of that risk to the various tranches of the bond, and describe to the market the value, or rating, of each CDO. If your head is spinning right now trying to understand the CDO, know the following: they were explained even less thoroughly to the ratings agencies, and you’re much, much smarter than the poor, overmatched people working at the ratings agencies. If a CDO was made using the riskier leftovers from an otherwise not-all-that-disastrously risky pool of loans, it might receive a triple-A rating, indicating that it was relatively risk-free for investors. If it was made from the rank, murky, unidentifiable slop leftover from a truly horrific batch of the least responsible loans from the least responsible lenders, it should receive the lowest possible rating. Knowing the difference would require understanding the context of each of several thousand underlying loans, the danger of the various devices and incentives in each loan, and the fundamental change in buyer demographics, plus the capacity to gain this understanding through and around and over the misleading and persistent influence of the CDO managers, for whom there was overwhelming incentive to make sure their particular CDOs were rated as highly as possible. The ratings agencies were completely overmatched.
Smart investors wanted to bet against mortgage bonds, and the smartest of the smart saw an opportunity in CDOs to bet against vast pools of comically overrated mortgages, the very worst scrapped, repurposed leftovers of a runaway real-estate market. CDOs were a desperately hatched device for squeezing investment income out of the excesses of the lending business, each one a towering symbol of market manipulation and greed, and for reasons both prudent and personal, smart investors badly wanted to see them dry up and fail, and to profit from that failure. The obvious answer was a credit-default swap, purchasing insurance against their failure without even buying into their risk. This required convincing someone, anyone, that CDOs were worth betting on, and, fortunately (or unfortunately), the market was never short on suckers. The same people who believed it was possible for home prices to rise dramatically forever were also happy to believe that any security backed by home loans was inherently low-risk, and they were all too happy to be on the other side of these CDSs.
This was a conveniently timed development, as the machine supplying new mortgages to the market had reached near capacity. Lenders could no longer supply new home loans to the market at the rate that investors wanted to trade them and bet for or against them. Credit-default swaps and collateralized debt obligations offered a terrifying and nearly mind-shattering opportunity for investors to continue to trade in this market even without a growing supply of new mortgages. Enter the synthetic CDO, the craziest thing you will ever read about, a security so imaginary and irresponsible you’d never believe it if I hadn’t just written a zillion words introducing it and it hadn’t helped bring down the world economy.
So, there’s a CDO, and that CDO contains thousands of crappy leftover mortgages and will generate a certain fixed maximum amount of revenue, which will then be divided up among the investors in the CDO based upon how much they paid to get into the transaction. Then, there is an investor who has bet against the CDO, by purchasing a credit-default swap with the CDO’s manager: he too makes monthly payments to the CDO, but instead of owning a home, he’s insured against the default of the CDO. If a certain percentage of the CDO’s underlying loans go into default, the entire CDO is considered in default, and he is owed the full value of all the underlying loans. Maybe it’s a long shot, maybe not, but the payoff is enormous. That’s a CDO, and a CDS on that CDO.
A synthetic CDO is a security that takes the monthly payments made on credit-default swaps, groups them together into a big bond, and sells memberships to that new CDO in the same way one would with a CDO made up of mortgages. So, we’ve got a bunch of subprime-mortgage backed bonds and CDOs, and each one has a smart investor betting against it. Each smart investor pays a monthly fee for the right to collect the full value of the respective bond or CDO if it goes into default. We take those monthly payments and, instead of putting them towards our own bottom line, we pool them together and sell the right to collect a piece to individual investors. Now we have a security that is backed by bets against securities backed by subprime mortgages. And it is supposed to fall to those same overmatched ratings agencies to look at the bets for and against the underlying bonds they have failed to understand the first time around and determine the value of a bond containing hundreds or thousands of these bets. This was simply impossible. The ratings agencies had wildly overrated the value of the home loans, and so bets against those loans were wildly underrated. It was therefore seen as safe and low-risk to purchase one’s way into a synthetic CDO. CDO managers were passing along the risk of default in their mortgage-backed CDOs to investors who owned no stake at all in the underlying homes. These investors were making a wager and only a wager.
And, of course, happily on the other side of this transaction were those same few smart investors, eager to bet against not only a bond backed by risky mortgages given to unworthy borrowers, but imaginary securities that made money by accepting only the risk of insuring those loans and that paid 100% of the referenced value in the event of a likely default. This was bad for the economy, and least of all because now apparently Dr. Seuss was designing complex hundred-billion-dollar marketplaces. Through synthetic CDOs, many thousands of people were able to attach their investment money and their livelihoods to the performance of subprime mortgages. Where the risk of default had previously been with the lender, and then with the secondary purchaser, and then with the bond-holder, it could now be spread further outward to people who simply thought wagering on the marketplace was a worthy investment without any physical collateral.
Because all such things are doomed to failure, the whole thing failed. Adjustable rate mortgages aged beyond their teaser rates and floating rates kicked in, right around the time home prices reached levels of bald absurdity. As loans went into default, homes were abandoned and foreclosed upon, and housing supply gained ground on demand. At the same time, investors got wise to the massive, apocalyptic levels of risk they’d bought into as bonds and CDOs began to default, first slowly and then catastrophically. Home prices slowed their ascent and finally leveled off, effectively ending demand and spreading panic among borrowers who’d only purchased homes as short-term investments. And the cost of those defaults trickled outward, now far beyond those who’d made the loans and those who’d bought the loans, out to those who’d laid enormous bets on those loans back when investors had looked for any way to get in on the “low-risk” mortgage business. As default rates climbed, bonds and CDOs followed suit, and those who’d bet against them with credit-default swaps stood in line to collect 100% of their value, now not only from those left holding the properties but from investment banks and insurance companies and whole cities and whole countries who’d been on the wrong side of innumerable trades and wagers all tied to the performance of hundreds of thousands of disastrously irresponsible mortgage loans.
Where a responsible economy might allow the sale of a loan to a secondary market, and might appreciate the way that process enables lenders to extend their business to non-traditional borrowers, a runaway marketplace allowed the recklessness of investors and bond traders to virtually obliterate whatever sensibility once existed in mortgage lending. The job of the investor is to look for ways to use money to make money, of course. In this instance, it would be easy to be on the side of the smart investors who bet against the subprime-mortgage market: they recognized a free-market that had gone completely out of control, which puts them well ahead of the morons who paid to lose and the sleazy assholes who set the whole thing in motion with originate-and-sell lending practices. But the reality is, the subprime-mortgage backed disaster, in whose crater we are still assuredly stuck, was just another example of wealth being consolidated obscenely in the pockets of a very small minority of people. And we’re not talking about a big salary bonus. Hell, we’re not even talking about the Powerball. We’re talking about billions and billions of dollars. So much money was accumulated by the very few smart guys who bet against the runaway system that there was not enough left over to continue to pay your unemployed neighbor to do his job. Whole huge financial institutions, like Bear Stearns and Merrill Lynch and Lehman Brothers, lost all their money forever to a small group of investors. AIG had to be bailed out by the Federal Reserve because of how much money they owed to the smart guys who bet against the market.
And the synthetic CDO, the ultimate symbol of market greed and irrational exuberance, was created just as much by and for the people who saw the disaster coming as it was for those who thought more of the same was exactly what the market needed. This is how a person defaulting on a home loan ripples out beyond the loss to the homeowner and the person holding the loan, through nonsensical securities that extend the risk of that simple transaction outward to the nether regions of the investment community, where it can be tied to major insurers and 401Ks and pension funds, where you losing your job in a layoff becomes ten other people losing their jobs in ten other towns around the country as financial institutions scramble to write massive checks to the few smart guys who guessed right.
Christ. That’s enough. Have a great weekend.
Miserable Shitehawk is just some guy who happens to think things about things. He can be seen from time to time here on Sidespin and also on Twitter @MadBastardsAll.