A Mortgage in Stockton Flaps Its Wings and Global Finance Collapses

In chaos theory, the "butterfly effect" is the idea that a tiny flap of wings in one country will contribute to a reaction in another that can wildly alter the weather of, possibly, both.

The current global credit typhoon has its own butterflies. Among them: a modest 2002 home purchase in, say, Stockton, California—financed with a nonprime, or otherwise faulty, mortgage loan.

By the time that home in Stockton was supporting two or three ill-advised loans in 2005, those loans had disappeared into packages called asset-backed securities (ABS), then were to global banks, insurance companies, and pension funds—particularly in Europe. Like their US counterparts, the European financiers bought boatloads with borrowed money. Then they, too, shoved them off books into Structured Investment Vehicles that required no capital charge and little reporting.