They did what?

A sensible investor always asks two basic questions. What is the level of risk? Where, exactly, does the risk reside?
Time was when those questions were easy to answer. When a home buyer applied for a mortgage, the lender would examine his income and other elements of credit worthiness, check the current market rates and offer an interest rate that reflected the degree of risk.
Then government grandiosity made its appearance. Corporate gunslingers assumed control of Freddie Mac and Fannie Mae, the two big mortgage aggregators. Fannie Mae went further, becoming the home of out-of-work Democrats who had done as much damage as they could elsewhere in the government.
When Congress erased the long-standing separation between between ordinary banking and investment banking, in 1999, the hustlers saw their chance. They started bundling home mortgages by the dozen, by the hundreds, by the thousands, and selling them as bonds.
Suddenly, through the magic of government arrogance, all of those differential risks had been reduced to one interest rate, and that rate was high enough to attract high rollers and institutions all over the world.
Worse, some of the mortgages were time bombs, carrying interest rates that underpriced the risk.
Any sensible, old-style investor would have asked, "Why the hell would I buy that? How much risk is there? Where the hell does the risk reside?"
But those questions apparently weren't asked often enough. When high-risk mortgages began going into default, holders of the mortgage-based bonds must have started wondering what it was they were holding. Then the defaults became an avalanche and spread to higher-quality paper, and the holders knew what they had and tried to bail out.
Now, the toll is high and rising. Fannie Mae and Freddie Mac have been seized by the government, always a reassuring sign, and three of Wall Street's five biggest brokerages - Bear Stearns, Lehman Brothers and Merrill Lynch - are on history's ash heap.
A small city in northern Norway has been rendered insolvent.
Soon, momma will reappear, with a list of new regulations in one hand and a stick in the other.
The only winners will be the corporate gunslingers at Freddie Mac and Fannie Mae, who did something that would be impossible without government connivance: they privatized the profits and socialized the costs.