But what happened when the real estate market confounded recent history and began to turn down? People holding the paper could no longer be sure if or when their particular slice would be repaid. The traditional accounting approach -- of estimating the projected cash flow and then discounting for the risk -- didn't work. With 10,000 disparate mortgages underlying the paper, both the rate of cash payments and the risk of default were impossible to predict. So the pyramid began to wobble.
The hubris in this system was Wall Street's confidence that it could value paper securities that had been sliced and diced so many times that they no longer had solid connections to their underlying assets. The nation's leading financier, Warren Buffett, had warned years before that "derivatives," whose value was balanced loosely on the real assets underneath, were the equivalent of "financial weapons of mass destruction." But in the rush for profits, nobody listened.
I've saved the worst for last. Do you want to know who is bailing out America's biggest banks and financial institutions from the consequences of their folly -- by acting as the lender of last resort and controller of the system? Why, it's the sovereign wealth funds, owned by such nations as China and the Persian Gulf oil producers. The new titans are coming to the rescue, if that's the right word for their mortgage on America's future.
