Portfolio’sWeb site gets creative, using cartoon water buckets to illustrate how CDO tranches can run out of cash:

Think of mortgage payments as small trickles of water that all flow down into a much larger pipe. When a bank creates a security backed by mortgage payments, it diverts that pipe into a bucket. That bucket, or an AAA-rated tranche, is then sold to investors

Check it out. Otherwise, you’re stuck with standard business-press explainers, which hurt the brain:

The Times tries in early November:

The trouble stems from the banks’ significant involvement in collateralized debt obligations, which raise money by selling bonds to investors and using the proceeds to buy other bonds, many of which are backed by subprime home loans.

In August, the Journal tried a quiz:

What does CDO stand for?

A. Covered debt option

B. Chief debt officer

C. Capital divestment offer

D. Collateralized debt obligation

ANSWER: D. A CDO is a collateralized debt obligation, a bundle of bonds that often contains many securities backed by subprime mortgages. What this means, in plain English, is that instead of banks bearing the whole risk of lending to less creditworthy borrowers, they package their loans together and sell them to investors.

Our advice: Keep trying.

The Bush Administration hasn’t given reporters much over the last seven years, but credit the effort of the Washington Post’s Robert O’Harrow, who’s still digging. He explains how he got the whiteout treatment when he filed a Freedom of Information Act request for State Department records on Blackwater Worldwide:

A review of the just-released documents — papers regarding the Worldwide Personal Protective Services contract — found that about 169 of the 323 pages released were blank or nearly so.

Dozens of the documents are devoid even of page numbers, never mind information about spending patterns and other questions that have dominated recent congressional hearings about Blackwater’s roles in a series of deadly incidents.

We hope O’Harrow or the State Department can fill in the blanks soon.

Finally, the business press is beginning to get its arms around the staggering proportions of the subprime story, as a piece last week by Greg Ip, Mark Whitehouse, and Aaron Lucchetti on page one of the Journal shows.

This sprawling and arcane story doesn’t lend itself to eloquent explanatory pieces, but these reporters put together an all-important big picture out of the puzzle of write-downs, foreclosures, and collateralized debt obligations.

Over the past decade, Wall Street built a market for more than $2 trillion in securities sold globally and backed by loans to U.S. homeowners on two long-accepted beliefs and one newer one. The prevailing logic: The value of the American home would never fall nationwide, and people would almost always make their mortgage payments. The more recent twist: Packaging mortgage loans and turning them into securities would make the global economy more resilient if anything went wrong.

In a matter of months, though, much of the promise of the new financial architecture — together with its underlying assumptions — has proven to be a mirage. As house prices fall and homeowners default on mortgages at troubling rates, the pain has spread far and wide. An examination of the resulting crisis shows that it is comparable to some of the biggest financial disasters of the past half-century.

That’s a credit.

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