The story of five school districts that invested borrowed money in an attempt to earn larger returns is back in the news as the result of their court case against the two organizations that sold them the deal.
This is an up close and personal portrayal of the rather esoteric things referred to as CDOs...Collateralized Debt Obligations. The CDOs that were purchased contained some of the Fannie Mae/Freddie Mac garbage that blew up a short time ago. So, bad mortgage deals that some politicians wanted made so that their constituency would continue to vote for them have come home to roost in five school districts in Wisconsin.
Up until recently, we've listened to news and watched hearings on television and been somewhat removed from the whole discussion. Now we watch the stock market lose something on the order of thirty percent of its value even after the "bailout" plan was enacted. Those who have investments see their hopes being delayed, if not dashed. People thinking of retiring within the next year to five years are probably re-thinking if they counted on their investments as part of the money they'd live on in their 'golden years'.
All that is bad enough, but now we learn that these school districts were owners of some of the 'crap' mortgages. The districts have tried to portray themselves as 'innocents' but news articles today appear to destroy that position. They were apparently told about the 'risk' but chose to ignore it for a greater return than otherwise available.
They seem to have known that they could lose their entire investment if the default rate rose above 4.95% but would remain whole if the default rate stayed beneath 3.95%. They were also told, apparently, that the "highest historical default rate in the past 23 years" was 1.85%, so where was the risk?
The risk was in the Fannie Mae/Freddie Mac garbage loans that were a part of these 'great deals', and the default rate did exceed the 23 year high. And some of our (the nation's) elected officials were pushing for even more. 100% mortgage loans to questionable credit risks is simply stupid. These politicians wouldn't have lent their money in that manner, but they were really anxious to get our money into those deals!
