[merrylander]

This was part and parcel of the whole mortgage scam in this country. Initially it started with Freddie Mac and Fannie Mae. They would take a group of mortgages and 'securitize' them. This simply meant that they would take a group of home mortgages and bundle them together and sell the result. They at least were guaranteed by Fannie and Freddy and the idea was the whoever granted the original mortgage would be paid so they would now have more money to lend.

With the derivatives they played games; first off they were not guaranteed by anyone. Secondly, since whoever granted the mortgage got paid off there was no risk to them so they gave mortgages to anyone who wanted one. Now remember that in our strange system when someone grants a mortgage they take off one or two 'points' - typically a single percent of the mortgage value per point. So the original mortgage got 'sold' to one of the big banks and the grantor made a profit. The big bank bundled many mortgages into a 'derivative' and sold them in slices (they used the French word 'tranche'). Now the mortgage is no longer held by a single institution but by several institutions.

Moral of the story is that if you want something screwed up let the big banks make the rules, if you want it royally screwed up let Wall Street do it.