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When it comes to making a profit using other people's money, our financial system's tops.

RON BANCROFT January 6, 2009

I enter 2009 with the words of two classics conflicting in my mind. When I am feeling hopeful, the words of Charles Dickens come to mind: "It was the best of times, it was the worst of times."

However, more often these days my frustration over the way all of us Americans were complicit in the financial collapse of 2008 leads me to the statement by a character in Shakespeare's "Hamlet": "Something is rotten in the state of Denmark."

We as a nation have certainly been living well beyond our means, but the collapse of 2008 was something much more. It has shaken two of the very foundations of American culture – accountability and trust.

The Ponzi scheme we should be concerned about was not Bernie Madoff's. It was the Ponzi scheme that was the entire financial sector of the American economy.

Here is how it worked: A family of modest income and two televisions longed for a mansion of their own, just like Paula Abdul and A-Rod. Along comes a representative from Washington Mutual, a company that early on in the credit boom started promoting itself as "The Company of Yes."

For "The Company of Yes" there were no bad credit risks, just more potential American homeowners. In this case and many more like it, WaMu loaned this family with an income of $14,000 the money to buy a house for $720,000. WaMu collected a hefty fee for this transaction with no risk because it was able to package this loan with many others and sell it through an investment bank to investors as a collateralized debt obligation (CDO).

The investment bank collected a hefty fee and no risk because they simply packaged and sold these highly profitable CDOs. The beauty of the CDO, according to none other than Alan Greenspan, then chair of the Federal Reserve Board, was that by combining packages of many mortgages into these CDOs, no one CDO had much risk.

Then came the ratings agencies like Moody's and Standard and Poor's, whose job it is to assess risk on bonds such as these. What did they do? They rated all of these bonds AAA – the highest and safest credit rating – even though in most of these packages the entire bond defaulted if more than 6 percent or 8 percent of the individual bonds defaulted.

So these seemingly safe, relatively high-yielding bonds were actually time-bombs fueled by the kind of loan that started this chain. These time bombs were sold to pension funds, hedge funds, even school districts all over the world, making lots of money for the brokers who again collected a good fee and no risk.

Why worry, if one could sell AAA-rated bonds? Oh, I forgot to mention, these bonds conveniently became the predominant driver of fee-based income for the rating agencies.

This was almost the ultimate Ponzi scheme but for one factor: In spite of the considerable volume of subprime loans that companies like WaMu and Countrywide Finance could produce, it still wasn't enough to satisfy Wall Street's appetite for riskless returns. More leverage was needed.

Enter the Credit Default Swap (CDS), that fiendishly clever and complex deal that eventually became the napalm of the financial system.

The CDS made it possible to layer multiple levels of fee-based bets on whether or not any given package of CDOs might fail – whether or not one held the CDO in question.

Thus, if a certain hedge fund felt a Lehman CDO might fail, it could buy a CDS to "insure" against this. As a subsequent report on National Public Radio put it, it was like anyone being able to buy life insurance on a patient who seemed to be dying, regardless of the life insurance already in place.

When Lehman "died," the incredibly complex layering of CDSs on CDOs ignited a financial collapse that has already cost us trillions of dollars.

It turns out we were all part of the Ponzi scheme. Most of us just didn't know it.

Most disturbing is that there was no accountability, except perhaps...