House of Cards

   The plan works like this: First, a bank lends money for someone to buy a house (a mortgage). Historically, the lender would keep the note while the borrower pays it off. But then someone got the idea that if a larger institution bought the mortgage, the bank would have fresh money to make more loans, while still collecting payments from the first borrower, taking a cut and passing on the rest to the larger institution.
   Step Two: The larger institution now has a stream of money coming in from many sources, so it can "package" the mortgages and sell new notes to investors, using the expected income stream as a base. (It's like a manufacturer using the expected money stream from future sales as a base, and selling shares in the company to investors. The difference is that with home loans, the product -- a house -- has already been sold.)
   Step Three: Now, the system can market new notes based on income from the first notes. The income stream is now a river, with many tributaries -- individual mortgages.
   Step Four: Financial firms -- being Masters of the Universe, after all -- gather the cash flow from various tributaries into new income streams, each marketing investment notes in a stream so investors can drink from the stream before it reaches the river.
   So far, so good. Packaging the mortgages was good, since it enabled local banks and mortgage lenders to make new loans without waiting for the old ones to be paid off.
   Why not, then, package the packages , thus spreading the risk even further, and enabling still more mortgages?
   Great idea. And as long as the housing market booms and people keep buying houses and they keep up with the payments, everything is fine. As everyone knows, housing values always go up, and people always keep up with their payments.
   (There may have been a couple of times in the distant past when a few of one or the other stopped, briefly, but those days are long gone, never to return.)
   All we need to do, said the bankers, is to keep signing up buyers and issuing mortgages, and everybody's happy. And if anyone sounds what they think is a warning, we'll just give our products new names, so that means they're not really the same thing anymore. Plus, if we separate the risky loans from the not-so-risky ones, that will make the whole structure safer. Besides, only the really risky ones could possibly default, and the others will still be healthy.
   In any case, just like any other business, we have to sell product so our people can earn more commissions. After all, that's what we're here for, right? To sell product.
   It's naive to think we only make mortgage loans to serve a public need. We have needs, too. Besides, with government guarantees, there won't be a problem if a few defaults happen. The whole system can't collapse. Not that it will, there's little chance of that. But even if by some weird, remote, wild and crazy chance of widespread default, the government can bail us out, since the system is vital to our national survival.
   Not only that, but the bonuses to our sales agents and supervising executives will stay in place.