Mortgage Mess or Mortgage Heist?

Everyone has read the horror stories arising from the subprime mortgage situation currently unfolding in America. Heart tugging pictures grace all forms of media bringing the alleged crisis into our living rooms on a nightly basis. One attuned to current events can only conclude this represents a financial catastrophe for America, right? Opinion pages and financial commentators alike assert subprime mortgages have wreaked havoc on both America's economy as well of that of the rest of the world's financial community. Fifty percent of this is correct.

Each day seems to come with a new disclosure of loss incurred by various and sundry institutional investors around the world. Recent revelations by Societe Generale of a 2.6 billion Euro write down related to U.S. mortgages is typical. The numbers are all over the board, but most experts assert total losses coming from American subprime mortgages exceed $500 billion. Much of these losses were incurred by American entities, however a substantial amount has been absorbed by myriad international investors located everywhere from China to Dubai.

How did these losses happen? During the housing bubble many mortgage lenders opened up the spigot approving mortgage applications which traditionally would have been rejected out of hand. Lenders were able to throw all previous lending standards out the window because of a nefarious new financial machination called a collateralized mortgage obligation (CMO). Toxic loans, some of which were almost guaranteed to default, were sliced and diced ending up as CMOs which was then sold to eager hedge funds, investment banks and sovereign wealth funds around the globe.