Quote:
Originally Posted by Mark M
4. A lot of the debt in #2 was mortgage debt, which was making TONS of money because housing prices were skyrocketing (a.k.a. a bubble). This has happened before, such as with Internet company stocks in the 90s: people think something is worth a lot, even though there's no real way to tell what the value really is. But folks are making money, so what the hell?!
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Excellent post
However I would add a 4.5 in there...
4.5 These securitized debts (repackaged into investments that could be sold), were then leveraged into credit derivative swaps. I seriously don't know what the **** that really means despite reading about it, but as far as I can tell it's a side bet placed on whether or not the original debts will be paid. However we allowed side bets worth far more than the initial debt. So maybe you had 50 billion in actual mortgage debt out there, but with 500 billion in side bets on whether or not it would be paid. AND these finance wizards BORROWED to make these side bets.
EDIT: Here's a nice explanation of credit derivatives that Lehman brothers put together in 2001. Oh this is just too ironic:
http://www2.wu-wien.ac.at/vgsf/curri...0Explained.pdf