Hugh Sunday explains the predators’ techniques in A short rough primer on leveraging and derivatives: “Leveraging means something like this. You sell $10 million in stock. You use this money as the basis to take out a loan so you can buy $100 million in mortgages. Now say you issue mortgage-backed securities based on these and sell them. Now you have a $100 million in cash so you go out and buy more mortgages only this time you use your $100 million to buy a billion dollars of them. You have just leveraged your initial $10 million 100 times.”
Can anyone do this? No. “This works if you, your banks, and the buyers of your paper are all sufficiently greedy. Why would banks loan you $100 million on $10 million collateral? The short answer is they wouldn’t for you or me, but they would and did to financial companies because of the fees and interest they made off of such transactions and because they ‘knew’ those companies were good for it. . . .”



