“The Giant Pool of Money”

One of the best explanations of the whole subprime/credit crisis we’re watching now comes from a segment of NPR’s This American Life. It’s a beautiful bit of reporting, going into enough detail to make you say, “Ahhhhh!” without overburdening you with too much financial detail.

Even better, it’s available as a very readable transcript.

There are problems. Individual mortgages are too big a hassle for the global pool of
money. They don’t wanna get mixed up with actual people and their catastrophic
health problems or debilitating divorces, and all the reasons which might stop them
from paying their mortgages.

So what Mike and his peers on Wall Street did, was to figure out how to give the
global pool of money all the benefits of a mortgage – basically higher yield – without
the hassle or the risk.

So picture the whole chain. You have Clarence. He gets a mortgage from a broker.
The broker sells the mortgage to a small bank, the small bank sells the mortgage to
a guy like Mike at a big investment firm on Wall Street.

Then Mike takes a few thousand mortgages he’s bought this way, he puts them in
one big pile. Now he’s got thousands of mortgage checks coming to him every
month. It’s a huge monthly stream of money, which is expected to come in for the
next thirty years, the life of a mortgage.

And he then sells shares of that monthly income to investors. Those shares are
called mortgage backed securities. And the 70 trillion dollar global pool of money
loved them.

You can download it here. Highly recommended.

About Andrew Kantor

Andrew is VAR's editor and information manager, and -- lessee now -- a former reporter for the Roanoke Times, former technology columnist for USA Today, and a former magazine editor for a bunch of places. He hails from New York with stops in Connecticut, New Jersey, Cincinnati, Columbus, and Roanoke.
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3 Responses to “The Giant Pool of Money”

  1. I really do love that explanation of the mortgage crisis. There haven’t been very many simple explanations such as this, and many laypeople I speak to really don’t have any grasp of how or why the crisis happened — they just know it has something to do with people no longer being able to afford their mortgages. Kudos to NPR for making it understandable for the masses.

  2. That sounds like a monopoly. There is a lot of control a firm has when they have that much leverage over banks or lenders. Very interesting information.

  3. That’s great, I never thought about mortgage crises like that before, but have you thought about how to over come or minimize such crises?

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