Just over a year ago, Chuck Prince, then-chief of Citigroup, was “still dancing” in the mortgage-roiled credit markets. More recently, after spending a lot of time “thinking about what happened”, he reached the conclusion that “the credit crunch and its painful consequences were unforeseeable”. Not to beat up on a guy when he’s down, but . . . Chuck, you’ve gotta be kidding.

The origin for this market chaos was the mortgage market. Think about what a mortgage is. If I buy a home for $500,000, with a $400,000 mortgage, do I own the house? Not really. The lender can sell my home against my will if I miss a few payments. In a very real sense, the lender owns my home, while I own an in-the-money “call option” (participating in the upside) with a “strike price” of $400,000. I can pay the lender $400,000 any time I choose to own the house. I’ve paid for that call option with my $100,000 down payment and monthly mortgage payments, which is not unlike a ½ per cent monthly “premium” to roll the option forward.