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Wednesday, December 05, 2007

The mortgage crisis: illustrated version

Trying to understand how a bunch of "subprime" loans caused a mortgage crisis? This animated mortgage crisis illustration might explain. Basically, banks sold mortgages as "securities" (think mutual funds) to other investors but dramatically underestimated the risk of widespread defaults (foreclosures).

In other words, when those crazy adjustable-rate mortgages started bankrupting people all over the country at once, the flow of cash dried up. And that meant that those securities (stocks) dropped precipitously in value. Oops.

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