Collateralized Debt Obligations

If fossil fuels were the key accelerator of The Story Of Progress, financial innovations like stocks, bonds, and mortgage agreements were a close second. 

By the 19th and 20th Centuries, owning a house (along with a 30-year mortgage) became an essential ingredient of the Leave It To Beaver lifestyle so many yearned for. By the 1980s, not only had mortgages become ubiquitous in the United States, but investors had taken to profiting off them through mortgage-backed securities. Mortgages were sold off by the thousands, aggregated, and repackaged into something investors could buy. By pooling hundreds or thousands of mortgages together into one asset, investors could take on more risk and thus garner greater returns than ever before.

These new instruments revolutionized the financial industry. Investors made millions and the economy grew rapidly. At first, they were largely quite safe bets. After all, mortgages were typically only given to prospective homeowners who could be relied on for their monthly payments.

But the market’s appetite proved insatiable.

As investors maxed out their investments on the safest mortgages, they looked to lower-rated, riskier mortgages to invest in. Banks, in turn, started handing out more “sub-prime,” riskier mortgages to feed the habit. Where once banks were quite restrictive in who they would offer a mortgage agreement to, by the 2000s many were handing them out to just about anyone. The housing market boomed.

The financial industry didn’t stop there. Now with an even bigger pool of mortgages to bet on, they also developed more complex financial instruments so they could make even more investments. Mortgage bonds got further re-packaged into Collateralized Debt Obligations, or CDOs, and eventually CDOs squared, and synthetic CDOs. As Anthony Bourdain explains in the 2015 film The Big Short, CDOs are essentially a way to repackage lower-rated (and therefore riskier) mortgages into something that appears diversified and harmless. They are the three-day-old halibut that gets sold as a novel fish stew to naive, trusting customers.

In short, prospective homeowners were given loans they would almost certainly default on, and investors, confident in the stability of the housing market, found more and more ways to leverage themselves against those doomed assets.

What is obvious now came as a shock to nearly everyone at the time: in 2008, the U.S. housing market and large portions of the financial system collapsed. Millions defaulted on their mortgages. Huge banks went under. The global economy went into a tailspin. 

Where Exxon Valdez and other oil spills demonstrated the false “Progress” of our energy systems, the 2008 financial crisis demonstrated the false “Progress” of our financial systems. The sense of progress earned through owning a house was proven a mirage. The sense of progress earned through seeing your investments grow steadily was proven a mirage. Money itself was proven a mirage, a number on a screen that could vanish in an instant.

Yet again, trusting those who stoked the fires of Progress proved not only foolish but catastrophic.