My summary goes something like this:
- Consumers borrowed money to finance their homes or took out second mortgages to fund other purchases (sub-prime loans)
- Investors placed bets on whether or not those consumers would default on their loans (Credit Default Swaps)
- They paid for those bets using borrowed money (leverage)
- Bets that were placed when the odds were better grew in value as the odds worsened and it became more likely to pay out
- The investors who originally placed those bets then sold them to others hoping to benefit from a more certain pay out
- All of this happened in a dark alley of private, unregulated transactions
- Now, no one knows what those bets are worth and who is holding them
- So no one is willing to lend to anyone else
Listen to the full show: Another Frightening Show About The Economy.
This American Life
Chicago Public Radio