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Chapter 12: The Collapse!

revaluing an asset according to the price it would fetch
on the open market, regardless of what the owner paid
for it. Once the market headed south, investors who had
bought assets on the margin were subject to margin
calls as the value of their assets dwindled.
When you buy an asset on the margin, you borrow
money from your stockbroker or your lender. You
experience a margin call when the lender demands
payment of the loan. Sometimes this is referred to as a
"call market." The margin calls forced many investors
into bankruptcy.
When JP Morgan invented the credit default swap
in the 1990s, the practice of trading risk made good
economic sense, as did the practice of securitizing debt
into collateralized debt obligations. These methods still
make good economic sense. Problems occur when
banks abuse these business practices.
What has Congress done about the problem?
Rather than penalizing the abusers, Congress has
criminalized honest mistakes, poor judgment, and
ignorance. It has created an atmosphere of fear and
intimidation.

THE STUDENT LOAN MARKET
So what is the current situation with securitizing
debt into CDOs? Securitization is alive and well in the
student loan market. Asset Backed Securities (ABS)
financed a significant portion of the student loan boom.
Students owe more than $1 trillion to the federal
government; this debt exceeds total credit card debt.

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