Their own little toxic asset

NPR's Planet Money folks get an inside look at how those deadly packages of bad real estate loans are now being bought and sold in the private market (goodness knows how many times they've changed hands since the bust). They find a guy named Wit Solberg, whose Kansas City firm goes through countless numbers of these bad-boy bonds each day. It's a pretty interesting process.

Solberg starts searching for a bond we might want to buy. And that searching looks a lot like checking your e-mail. Brokers keep sending him announcements about which toxic assets are for sale today. One says: "Cheaper!" Another says: "Super senior steal!" Around lunchtime, Solberg finds a bond he likes for us. It's called an Option One Mortgage Loan Trust, or OOMLT (pronounced om-let). Solberg thinks we should offer to buy the bond for "half a cent" on the dollar. That means that, for every $1,000 of the bond's original value, we'll offer $5. But it turns out the guy who's selling the bond wants 17 or 18 cents on the dollar -- more than 30 times what we bid. Solberg says these kind of huge spreads are pretty common in the toxic asset business. People just radically disagree about what things are worth.

What's especially interesting is that these bonds come with prospectuses that detail all the bum properties that are included.

Finally, we find a beautiful, totally toxic asset at what Solberg thinks is a good price: $36,000. Back in the bubble, somebody paid $2.7 million for this thing. We buy a piece from Solberg for $1,000. It's going to be our encyclopedia of the financial crisis. Our toxic asset has 2,000 mortgages, many of them in hard-hit states like California, Arizona and Florida. A lot of the people in our bond are really struggling. Almost half are behind on their mortgage payments, and 15 percent of the homes are already in foreclosure. At some point those homes will be taken over and sold for a loss. Every time that happens, the bond shrinks. Eventually, our part of the bond will disappear entirely.

The NPR folks bought the bond with our own money.