NahnCee,

Let me see if any of my fifteeen years working for Wall Street firms can help.

First how did it happen, the mortgage problem? Well I think everybody understands the sub prime aspect. Allowing people to have mortgages that have no business getting one. That’s what apartments are for or renting.

OK, here come the greedy Wall Street types (WS). Some of those people do nothing but think up ways to produce new products to sell to the public. So let’s take mortgages.

Mortgages have all kinds of seen and unseen parts to them. Most of us “see” the term of the mortgage, the amount, and the interest rate and monthly payment. The brokerages and banks see much deeper. They see the tranches which are fairly well known. It’s a “slice of the mortgage be it a slice of the monthly payment, the interest rate, the term etc.
(this is the simplified version) Now the WS and bankers “strip” these into different tranches, they calculate the rate of return on various tranches, bundle them together and sell them. Not only is this one operation performed but computers have allowed WS and bankers to formulate all kinds of different “products” that are calculated through internal rate of returns, strips of the strips and every kind of thing you can think of and they get sold.

Now Europe , China, the world watched this go on and started buying all these products. The products, CMO’s CDO’s etc continued to get rebundled and all were given AAA status as “good” investments. I mean who doesn’t want to own a home? Anyway after a period of time no one could put an actual value on these things that now banks all over the world owned in huge dollar amounts. Suddenly no one can sell them because the new buyer doesn’t know the value or even an approximation of the value. The guy on the street has taken all the equity out of his home for a new car etc and finds the mortgage he bough he can no longer afford because it was am ARM or his wife got sick and the second income went away of you name it.

The banks semi panic, along with WS because they all own stuff that’s worth ….what? No one knows…so they start to horde their money so they can pay operating costs. Some fail because they’re too highly leveraged…..they derived synthetic “products” from a computer model and the model didn’t account for human behavior.

So no one is giving out gobs of credit and the cascade of no credit for business; ceases and the business’ cease to function.

Needless to say the story has many chapters but this is basically what is happening. I hope this helped.