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A follow up post touches on this: http://www.npr.org/blogs/money/2010/09/24/130107647/what-does-it-mean-to-say-toxie-s-dead http://www.npr.org/blogs/money/2010

A follow up post touches on this: http://www.npr.org/blogs/money/2010/09/24/130107647/what-does-it-mean-to-say-toxie-s-dead http://www.npr.org/blogs/money/2010/09/24/130107647/what-doe... There are different classes of bond holders within their bond fund. Toxie was a lower ranked class that was assuming more risk, and we've now reached a point where a sufficient number of mortgage holders within the bond fund have defaulted, that there will never be enough mortgage payments coming in to pay the holders of Toxie-class bonds within this fund. Other people within the fund are still getting paid. If I recall correctly from earlier Planet Money podcasts, this was part of the problem. The overall fund would receive a low-risk rating, and those parts would be bought up by the really big institutional investors. The crappier bits of the same funds would then be sold to your local teachers retirement fund or similar, bought by investors who were savvy enough to realise they were assuming more risk. (I've almost certainly got some of that wrong - someone correct me!) Regardless: listen to Planet Money - it's 12-20 minutes 3 times a week, and they make a lot of complicated stuff relatively easy to understand and accessible. http://www.npr.org/rss/podcast/podcast_detail.php?siteId=94411890 http://www.npr.org/rss/podcast/podcast_detail.php?siteId=944...

fanboy123 16y ago
This might make understanding easier. Start 100M mortgages. 100M bonds (in reality for "safety" it was more like 95M in bonds.) 80M was part of the upper class. 20M was part of the lower class. If 30M of mortgages went busto without EVER paying a single payment and houses sold were worth 20M then 100% of the lower class got destroyed. Assuming the other 70M worth of mortgage holders kept paying until principle was returned the upper class never saw a single cent of loss and the lower class never gets paid a single cent of principle or interest. It is a clever piece of financial engineering that allows risky loans to be "safe." It is also why writeoffs can be complete for the lower class even though the asset (house) is sold with a positive value.

fanboy123 16y ago

This might make understanding easier. Start 100M mortgages. 100M bonds (in reality for "safety" it was more like 95M in bonds.) 80M was part of the upper class. 20M was part of the lower class. If 30M of mortgages went busto without EVER paying a single payment and houses sold were worth 20M then 100% of the lower class got destroyed. Assuming the other 70M worth of mortgage holders kept paying until principle was returned the upper class never saw a single cent of loss and the lower class never gets paid a single cent of principle or interest. It is a clever piece of financial engineering that allows risky loans to be "safe." It is also why writeoffs can be complete for the lower class even though the asset (house) is sold with a positive value.