(Cross comment from Ansel's post on Morgan Stanley/securitization.)
"This stuff is complex
Actually no, it simply has many different levels to it.
Firstly, ultra-leveraging (referred to as "shadow banking") along with ultra-leveraged speculation is where the fantasy finance spectrum begins, using nonexistent capital, or virtual capital, or layer upon layer of debt, to finance something and everything.
Although securitization is indeed important --- it first began in America around 1907 (Samual Straus) and really took off in the Roaring 1920s, leading up to the Great Crash of 1929 and the Great Depression (only halted by the passage of that legislation affecting Securities in 1933 --- back then it was the transformation of debt into stocks, while in the present it is the transformation of debt into securities), the primary cause of the bond market collapse, the freezing of LIBOR/EURIBOR, etc., was the greatest insurance swindle in human history, the utilization of "unregulated" (by design, by lobbying and by buying legislation) insurance, i.e., credit default swaps, or uncovered credit default swaps --- usually referred to as "naked swaps."
An unlimited amount of naked swaps were bought and sold: ergo you had $2 trillion of swaps purchased against $190 billion of outstanding external debt of Bear Stearns --- with the insurance payout, if BS was allowed to go backrupt, of $200 trillion --- far more money on the planet, and especially since they sold that "unregulated insurance" with zero capital on hand to back it up --- something routinely called financial fraud when your home insurance, health insurance or auto insurance company does such!
AIG Financial Products Division sold $460 billion worth of naked swaps, with the potential payout of from $20 trillion to over $40 trillion --- which was why the gov't took them over; which was why JPMorgan Chase, the originator of the credit default swap, took over Bear Stearns (which, together with Goldman Sachs and Deutsche Bank, they did a "bear run" on --- financial manipulation by the purchase of all those swaps against Bear Stearns [they weren't the only players, but they were the major players]).
[Update to original comment: So we have a possible or probable $240 trillion payout, but that wasn't all the payouts; due to the opacity of "shadow banking" --- "off-balance sheet-accounts" --- and those pesky, pesky hedge funds involved (and the largest banks own the largest hedge funds, which those criminal media minions never bother to explain), we have no real idea of just how many hundreds of trillions of dollars of "unregulated insurance" payouts were involved. The same applies to commodity futures contracts; an unlimited number can be bought and sold simply for purposes of financial manipulation/speculation!]
Yes there were many, many levels of details: securitization, trash tranches, rehypothecation (using the same collateral multiple times), speculation via structured finance (junk paper, or credit derivatives [toxic assets]), but regardless, and including the fraudclosure model (originated from within JPMorgan Chase, 'natch!), the actual principal and primary reason for the global economic meltdown WAS NOT a 4% foreclosure rate in the USA, but that largest insurance fraud in human history, by way of those naked swaps. Those other details were simply more wealth theft (referred to as "wealth transfer" by the criminal media minions!).
It is crucial to understand this as Wall Street-financed books have spewed forth purposely attempting to redirect attention away from the real reason --- financial fraud/insurance fraud --- and attempting to lay the real blame elsewhere.
Special links of the day:
(Yves Smith, formerly with McKinsey --- major jobs offshoring evangelist --- finally reconizes that jobs offshoring is baaaaad!)