Subprime 1-2-3

Don’t understand credit default swaps? Don’t worry—neither does Congress. Herewith, a step-by-step outline of the subprime risk betting game.

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Subprime borrower: Has a few overdue credit card bills; goes to a storefront lender owned by major bank; takes out a $100,000 home-equity loan at 11 percent interest

Lending bank: Assuming housing prices will only go up, and that investors will want to buy mortgage loan packages, makes as many subprime loans as it can

Investment bank: Packages subprime mortgages into bundles called collateralized debt obligations, or cdos, then sells those cdos to eager investors. Goes to insurer to get protection for those investors, thus passing the default risk to the insurer through a “credit default swap.”

Insurer: Thinking that default risk is low, agrees to cover more money than it can pay out, in exchange for a premium

Rating agency: On basis of original quality of loans and insurance policy they are “wrapped” in, issues a rating signaling certain slices of the cdo are low risk (aaa), medium risk (bbb), or high risk (ccc)

Investor: Borrows more money from investment bank to load up on cdo slices; makes money from interest payments made to the “pool” of loans. No one loses—as long as no one tries to cash in on the insurance.

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In "News Is Just Like Waste Management," we unpack what the coronavirus crisis has meant for journalism, including Mother Jones’, and how we can rise to the challenge. If you're able to, this is a critical moment to support our nonprofit journalism with a donation: We've scoured our budget and made the cuts we can without impairing our mission, and we hope to raise $400,000 from our community of online readers to help keep our big reporting projects going because this extraordinary pandemic-plus-election year is no time to pull back.

THE BIG PICTURE

You expect the big picture, and it's our job at Mother Jones to give it to you. And right now, so many of the troubles we face are the making not of a virus, but of the quest for profit, political or economic (and not just from the man in the White House who could have offered leadership and comfort but instead gave us bleach).

In "News Is Just Like Waste Management," we unpack what the coronavirus crisis has meant for journalism, including Mother Jones’, and how we can rise to the challenge. If you're able to, this is a critical moment to support our nonprofit journalism with a donation: We've scoured our budget and made the cuts we can without impairing our mission, and we hope to raise $400,000 from our community of online readers to help keep our big reporting projects going because this extraordinary pandemic-plus-election year is no time to pull back.

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