To see how crazy this was, imagine that Joe Sixpack offered to sell you a CDS on your $320,000 loan to your friend for $1,600 a year for five years. Joe is doing well, has a million-dollar house with no debt, and is therefore “good for the money.” Happy with $1,600 a year in extra income, Joe continues to sell CDSs on residential mortgages. Unregulated, he sells a thousand just like the one he sold you, and his income grows to $1.6 million a year. If these loans average $320,000 each, he is insuring a total of $320 million, all backed by his million-dollar house. You object, arguing that Joe
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