Reply #1: Once upon a time... [View All]

[izquierdista]

A bright banker decided to repackage bond payments. He sold the soon to be due payments to a short term investor, the mid-term payments to a medium length investor and the far in the future payments to a long term investor. Everyone was happy as long as the underlying bonds were sound and the payments were made. He turned the bond into a security with 3 tranches (slices).

Fast forward to the unregulated years of 2002-2005. A conniving mortgage broker got the bright idea to do the same thing with mortgages given to unemployed people who submitted fraudulent loan apps with ridiculous appraisals. Ta-da! Now what was once a mortgage is now a "security". Except that now, no one is exactly sure who services the original mortgage and the investor who put up the money is hung out to dry if one of the payments is missed.