That brings up another question. Which bonds & CDOs is the government actually insuring? I’d imagine there’s a good mix of low grade securities with high exposure in these “worthless” tranches which the government is also insuring. Which basically bails out these banks by allowing them to put an arbitrary value on these worthless, illiquid assets. Great use of taxpayer money!

Yes. If I am the lender and I hold a first mortgage on your home, lent with the guidelines that made sense (20% down), I can Say that even if the market dropped 30%, I’d recover most of my money.

But - big but - mortgages got collateralized in a crazy way. Instead of buying a piece of this mortgage, all pieces being equal, they were combined and sliced into tranches that had different terms. The tranche that had the final payments as collateral is worthless. Imagine if, instead of having 1 loan for $100K on my house, I have ten loans for $10K each. Well, the first lien is pretty well guaranteed, right? But as you move up to where there’s no value to cover the note, that last piece of paper has no value at all. Make sense?
Joe

Chris Moran