Financial Plumbing Problems

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It may feel the same with this financial crisis as it did 14 years ago, but this is much different.  Yes, both initiated by politicians and governments.  The 2008 “Great Financial Crisis” was started several years previous when the US government felt that Everyone should be a homeowner regardless of their credit worthiness.


You had a number of shady mortgage operations seize the day and the sub-prime mortgage business was under way.  These mortgages (backed by the likes of Freddie Mac and Fannie Mae) were packaged into investment buckets and slapped with a fancy Triple AAA credit sticker.  With this high-grade sticker, large investment banks would market them as income investments (the buyers would be pension funds, endowments, and John Q Public).


To juice returns, the investment banks traded Credit Default Swaps (CDS). In this instance CDS’s were designed as a form of insurance on bad mortgages in the pool.  The banks traded them and used CDSs as a profit center.  Credit Default Swaps were often backed by some of the largest insurance companies believing they were backing a Risk-Free investment.  After all they were Triple AAA quality and backed by Fannie and Freddie.  It was all a house of cards!

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