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The www.FedPrimeRate.com Personal Finance Blog and Magazine

Sunday, November 07, 2010

The Life and Death of A Mortgage-Backed Security

The Life and Death of A Mortgage-Backed SecurityListened to a great episode of the NPR radio program This American Life earlier today. Truly excellent. The show was about the life and death of a mortgage-backed security (MBS), which was given the innocuous nickname "Toxie."

Basically, a group of Planet Money reporters pooled their money to buy a bond backed by mortgage debt. This is same type of investment that caused the financial crisis of 2008 and the global recession that followed.

5 reporters contributed $200 each, and bought the mortgage bond for $1,000. During the housing boom, that same bond was worth about $75,000! The investment -- essentially a big pile of paper drawn up by lawyers -- actually does OK for a while, producing a stream of income in the form of a monthly check. Eventually, however, the monthly checks dry up, and the MBS dies. In total, the investment returned $449.06, so the MBS ends up losing $550.94. Each of the five reporters gets back $89.80 from their $200 contribution. Ugly!

The reporters decide to invest what they have left in a gold coin. Much smarter, considering how gold has been doing since 2008. Moreover, the Fed just announced a new round of quantitative easing: printing new money out of thin air to buy Treasury securities. These purchases will, among other things, weaken the dollar, and will very likely contribute to gold's rise.

To read more about this episode of This American Life, and to download the free MP3, visit this link. There's also a fascinating interactive timeline here. Highly recommended!

Toxie's Dead from Enkhtulga on Vimeo.

Here's a cartoon we made for NPR's show, Planet Money. It's about Toxie, a personified toxic asset that helped burst the housing bubble. enjoy!

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