So you understand how homeowners took out risky mortgages and such, but what about C.D.O’s, liquidity puts, and how they all play into the global credit crunch? If you’re still scratching your head, this article breaks it all down and puts it into perspective.
But it turned out that many banks had also sold complex insurance policies on the mortgage debt. That left them on the hook when homeowners who had taken out a wishful-thinking mortgage could no longer get out of it by flipping their house for a profit. Many of these bets were not huge, but were so highly leveraged that any losses became magnified. If that $100 million investment I described above were to lose just $1 million of its value, the investor who put up only $1 million would lose everything.
Just picture a collapsing Jenga tower and you’re just about there.