The Economy: Whaaaaaaat???????

For the past couple weeks I have tried my darndest to understand the global financial crisis. I've been listening to NPR's Planet Money podcast (which actually does help immensely) and reading the nytimes/wsj articles daily. As Bob Wiley would say.."I'm doin' the work! I'm babysteppin..." BUT, the whole things is still way way way way WAY too complex for me to grasp. I need help, and the sad thing is- EVEN WIKIPEDIA can't explain it. Today, I wiki-ed "securities" and got this:

  A security is a fungible, negotiable instrument representing financial value. Securities are broadly categorized into debt securities (such as banknotes, bonds and debentures), and equity securities, e.g., common stocks. The company or other entity issuing the security is called the issuer. What specifically qualifies as a security is dependent on the regulatory structure in a country. For example private investment pools may have some features of securities, but they may not be registered or regulated as such if they meet various restrictions.

HUH??? Okay, I guess I get it. A security is just a figure that represents the value of a certain product. I think. Right?

Moving on...

A mortgage is the pledging of a property to a lender as a security for a mortgage loan. While a mortgage in itself is not a debt, it is evidence of a debt. It is a transfer of an interest in land, from the owner to the mortgage lender, on the condition that this interest will be returned to the owner of the real estate when the terms of the mortgage have been satisfied or performed. In other words, the mortgage is a security for the loan that the lender makes to the borrower.

OK, that's a little clearer...now here's a toughy:

Collateralized debt obligations (CDOs) are an unregulated type of asset-backed security and structured credit product. CDOs are constructed from a portfolio of fixed-income assets. These assets are divided by the ratings firms that assess their value into different tranches: senior tranches (rated AAA), mezzanine tranches (AA to BB), and equity tranches (unrated). Losses are applied in reverse order of seniority and so junior tranches offer higher coupons (interest rates) to compensate for the added default risk. Since 1987, CDOs have become an important funding vehicle for fixed-income assets.

Some news and media commentary blame the financial woes of the 2007-2008 credit crunch on the complexity of CDO products, and the failure of risk and recovery models used by credit rating agencies to value these products. Some institutions buying CDOs lacked the competency to monitor credit performance and/or estimate expected cash flows. On the other hand, some academics maintain that because the products are not priced by an open market, the risk associated with the securities is not priced into its cost and is not indicative of the extent of the risk to potential purchasers.[1] As many CDO products are held on a mark to market basis, the paralysis in the credit markets and the collapse of liquidity in these products led to substantial write-downs in 2007. Major loss of confidence occurred in the validity of the process used by ratings agencies to assign credit ratings to CDO tranches and this loss of confidence persists into 2008.

Eh- I tired, but here's where I get lost. 

I think- I THINK, that CDOs are basically a bunch of different securities all bunched together. There may be some mortgage securities, some other types of loans, bonds, cash assets...yeah, I guess just a bunch of security-type things that represent a variety of products. People can buy shares of these security-bundles (CDOs). When they do this, they are owning little bits of every security...so maybe a little bit of someone's mortgage, a little bit of an airplane loan, a little bit of a corporate bond...etc. Every month people who own shares in these CDOs get money paid for by those investments/securities/whatever. 

SIGH. Now no one wants to buy shares in these CDOs anymore because they SUCK. Sooo...the government is going to buy them (with OUR taxpayer money), which means WE will all own shares in them. I guess. There's one big problem though- the government doesn't know how much they should buy these CDOs for because they currently have no market value (because no one else wants them!!).  So they'll have to make up a price and hope it works out. 

This is so hard. So, so, hard. I don't think I ever want to be a journalist if this is what it's like. 

I like jargon when I'm in on it. Like Bagel Shop jargon- Egg on ET no CB, for instance. I feel cool knowing what that means (eggcelent on an everything bagel with no canadian bacon).

I do NOT feel cool trying to decode finance jargon, however. I feel DUMB.

Thoughts?? Help??

ahhh- 12 minutes into Jeopardy already. Gotta go, 

Madge