Interesting 60 Minutes show Sunday.
They got at least close to the heart of the matter connecting the financial bailouts to the mortgage boondoggle. Here's a summary.
The mortgages get packaged by lenders into Collateralized Debt Obligations, CDOs. Then they are often sold on the market. Finance houses that pick the CDOs up are the insurance companies, stock trading houses and maybe even other larger banks. Once the CDOs are bought, they can be traded like any other commodity.
Along with the CDOs, the traders sell a hedge against the risk of the CDOs called Credit Default Swaps, CDSs. This is so that trading the risky CDOs have a kind of insurance, since the CDSs act that way. The companies selling these CDSs are the likes of Lehman Bros, Bear-Sterns, AIG, Merrill-Lynch, etc. Here's the thing: the CDSs purposefully are not called insurance contracts to allow the companies selling these to avoid having the required financial reserves that would otherwise be required if they were actually called insurance contracts. This is how the financial houses got around the law, until reality caught up with them.
Now when the bubble burst and the CDOs became less valuable, and how much value remains is still a big question, the CDSs started to kick in, just like an insurance product. After a short while the CDS contract providers ran out of cash reserves, if they had any at all, and the CDSs largely became useless, taking the companies selling CDSs like Lehman Bros, Bear-Sterns, AIG, Merrill-Lynch, etc down, and almost taking Citigroup down too. All because they had no reserve requirements and were not able to fulfill their
obligations.
So that resulted in the lack of confidence in finance houses, banks, etc, and their assets. And now you can't get working capital to buy that lumber for the big construction job contract you got back in July or make payroll until the last job pays off your invoice. And that also means you can't even take your crew to the strip club to celebrate finishing that last job 2 weeks early.
Pretty stupid, eh?
So that's how the mortgage boondoggle caused the rescue boodndoggle and even more problems for you.
(Well, simplified quite a bit, I guess.)



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