The Untold Truth of Mortgage Bonds and CDOs

💰Mortgage bonds were originally relatively safe investments backed by the U.S. government, but modern versions became riskier and privately backed.

🔢CDOs are collaterized debt obligations that package different levels of mortgage bonds together, making them seem diversified and less risky than they actually are.

📉The mortgage bonds underlying CDOs often contained subprime loans with low credit scores and risky adjustable rates, greatly increasing the likelihood of default.

📈Rating agencies and banks gave AAA ratings to many CDOs without thoroughly assessing their underlying bonds, leading investors to believe they were safe investments.

💣The housing market collapse caused a widespread economic crisis, as the value of these CDOs plummeted and threatened the stability of the financial system.

What are mortgage bonds?

—Mortgage bonds are investment securities backed by a pool of mortgage loans. Originally, they were safe investments guaranteed by the U.S. government.

What are CDOs?

—CDOs, or collateralized debt obligations, are complex financial products that package different levels of mortgage bonds together. They are meant to diversify risk.

Why did mortgage bonds become risky?

—Mortgage bonds became riskier when they started including subprime loans with low credit scores and adjustable rates. These loans were more likely to default.

Why did rating agencies give AAA ratings to risky CDOs?

—Rating agencies failed to thoroughly assess the underlying bonds in CDOs and gave them AAA ratings without proper justification. This misled investors into thinking they were safe investments.

How did the collapse of the housing market lead to an economic crisis?

—When the housing market collapsed, the value of CDOs tied to mortgage bonds plummeted. This caused widespread financial instability and contributed to the 2008 financial crisis.

00:00The video starts with a humorous conversation about the smell of money.

00:20Mortgage bonds were originally safe investments backed by the U.S. government, but modern versions became riskier and privately backed.

00:53The quality of mortgage bonds declined as they included subprime loans with low credit scores and adjustable rates.

02:03CDOs were created by packaging different levels of mortgage bonds together to create an illusion of diversification and lower risk.

02:40Rating agencies gave AAA ratings to many CDOs without properly assessing the underlying bonds.

03:49The collapse of the housing market caused the value of CDOs to plummet, leading to a widespread economic crisis.

04:49Chef Anthony Bourdain uses the analogy of a seafood stew to explain how CDOs are created.

06:12The video concludes, highlighting the catastrophic consequences of the housing market collapse.