Lily posing for the camera.
12 September 2008

I’ve been reading a lot about the credit crisis, trying to understand what happened and what is going on now. The current economic situation and its history are very convoluted and not easy for the layman to understand. I found two excellent radio shows produced by This American Life in conjunction with NPR. They are each an hour long, but very much worth the time:

The Giant Pool of Money aired on May 9, 2008.
And Another Frightening Show About the Economy aired on October 3, 2008.

Both of these shows are very very good. Really, take the time and listen.

This morning, Matt asked for a brief summary on what the shows were about and what else I had learned while surfing on our economic disaster last night. While talking to him, I kept using charged words that implied criminal intent, such as “they laundered the tranches of mortgage backed securities into a AAA rating by bundling good mortgage loans with bad mortgage loans” and “the credit default swap scam.” I told Matt that the words “scam” and “laundered” were my terms, and he said, “You should write a blog entry using your terms.” That, coupled with Sam saying, “Hey! Post more pictures!” has me here, writing this entry.

Adam Davidson and Alex Blumberg, though they didn’t use the word “laundered,” did say that bundling good mortgages with “toxic” mortgages was “a sort of financial alchemy.”

Jim takes that toxic stuff, these low-rated, high-risk tranches, puts them all together [with high-rated, low-risk tranches]. Re-tranches them, and presto: he has a CDO whose top tranche is rated AAA, rock-solid, good as money.

Personally, I prefer the word “laundered” because I find it much more accurate.

As for the unregulated credit default swap scam, I swear it reminds me of a pyramid scheme. At the top, you have the original bank that decided to insure bonds without the requisite capital, and then everybody piled on for the easy money.

However, I will admit that my knowledge on this subject is very limited; I had never even heard of credit default swaps (or CDOs for that matter) before this all went south. Listen to the two radio shows I linked. That’s where my information came from. And then decide for yourself if the words “laundered” and “scam” work well.