A fictious explanation?

Found on:

http://ars.userfriendly.org/cartoons/read.cgi?id=20080312&tid=2766985

Explaining the Sub-Prime Mortgage Mess:

"Gee, I'd like to buy a house, but I haven't saved any money and don't think I can afford monthly payments. Can you help me?" Mortgage broker: "Sure! You don't need a down payment since the value of homes always rises. We'll also give you a low interest rate for a few years and then raise it later, okay?"
"Sure. But my employer hates me and may not verify my employment. Is that a problem?"
"Nah. We use our special 'Liar's Loan.' Since we don't actually lend you the money, some bank does that, we don't care if you repay it or not. I'll still get my commission!"

Later, at the bank:
"Somebody get rid of crappy mortgages. They're stinking up my office!"
"Okay. I'll sell them to some smart guys in New York City."

Later, in NYC:
"Somebody get rid o these crappy mortages. They're stinking up my office!"
"But who would buy junk like this?"
"No one. So just create some new security and use them as collateral. Call it a CDO, sell it to some dumb investors, and promise them we'll pay them back when the mortgages are paid off."
"But who'd fall for that?"
"We'll pool them all together and only some will go bad. Since housing prices always go up, there's nothing to worry about! Divide them into three traunches: the Good, the Bad, and the Ugly. When some of the mortgages fail, we'll pay off the investors holding the Good first, then the Bad, and last the Ugly."
"Boss, you're the greatest! The Good investors have the least risk so they get a lower interest rate. The Bads get a better rate and the Uglies get a nice fat interest rate. Brilliant."
"Exactly. And if we buy bond insurance for the Goods, the rating agencies will give it a AAA rating. The Bads won't be very good and will get a BBB rating. We won't even let them rate the Uglies."
"Boss, you've turned stinky risky mortgages into AAA and BBB rated securities. You're a genius! But who do we sell it to?"
"Those SEC guys won't let us sell to widows and children so we'll sell it to our sophisticated institutional clients: banks, small towns in Norway, school boards in Kansas--anyone looking for a safe, high-quality investment."
"But they won't buy the Ugly piece."
"True. We'll keep that and pay ourselves a handsome interest rate."
"But since our only collateral is those stinky mortgages, we'll have to show them on our balance sheet."
"Nah. We'll get the guys who write the accounting rules to set up a shell corp in the Caymens. We'll put the crap on their balance sheet. I'll call it a Special Purpose Vehicle."
"But they won't allow that. After all, all you're doing is shoveling our own c4 around."
"Hah. I'll convince them it's vitally important to the financial system that investors not know about these types of complex transactions."

Later, in a small Norwegian village:
"Hey! Where's our monthly payment?"
Investment banker: "Sorry, but the idiots who took out the mortgages that back your CDO can't pay."
"But we bought the Good piece of the CDO, remember? The AAA rated, safe, insured ones? We get paid first!"
"Yeah, well, the loans were even crappier than we thought. We're as disappointed as you."
"But you said housing prices always go up!"
"Yeah. False assumption. Our mistake. Sorry."
"What about the AAA rating?"
"Yeah. Their mistake. They said to tell you they're sorry, too."
"Then we collect our insurance, right? They were insured."
"Yeah. There's no way they have enough money to cover all these losses. They said to tell you they're sorry, too."
"So what do I tell my Norwegian villagers?"
"Tell them you're sorry! And clean out your desk!"