The idiot's guide to why the credit card crisis is next


One of the reasons the U.S. got into the current economic mess is because mortgages were bundled into complex financial vehicles and sold to investors and so on down the road. Everybody profited handsomely, until people started defaulting on their mortgages, which started a chain reaction of payments nobody could meet, which in turn started forcing banks into bankruptcy, which itself led to all sorts of other problems. Big problems.

And the problems aren't over yet.

This same practice is going on in the credit card industry, and Paddy Hirsch, Senior Editor of Marketplace, has taken to the whiteboard to help illustrate how this process actually happens. Turning a receivable into an asset-backed security is referred to as securitization, and is explained in detail at Wikipedia, complete with complex terms and acronyms. Thankfully, Hirsch cuts through the complexity and does a great job of breaking down an otherwise tricky financial process with the simplest of tools.

While Hirsch chose to use a champagne bottle and waterfall to illustrate how credit card receivables became asset backed bonds. I feel that a trough and pack of wild hogs would have worked out just as well, though it would have been harder to draw!