American Dream unravels for poor and rich alike a
Mr Montes, a warehouse manager, and his family scraped together their savings and stretched themselves with a large mortgage on a $567,000 (285,000) bungalow in Fullerton, one of the state's more fashionable cities.
"We knew there wouldn't be any holidays for a few years and we wouldn't be eating out very often, but we wanted a garden of our own to look after and the girls to be able to paint their rooms any colour they wanted," Mr Montes said.
Their broker urged them to get on the property ladder before it was too late, assuring them that soaring house values would soon provide a tidy profit long before the initially low interest rate of the subprime mortgage he'd arranged for them took a significant hike upwards.
Now, two years later, the Montes family's dream of home ownership has turned into a nightmare, as interest rates have risen and house prices stagnated.
"We're caught in the trap," said Mr Montes, whose monthly repayments of just over $3,500 a month (1,750) plus insurance fees are set to jump by up to $1,000 (500) when the interest rate on his mortgage is reset in December.
His original mortgage lender, Wells Fargo, has withdrawn from the so-called sub-prime sector, no longer lending to low-income families like the Monteses.
Mr Montes has had to take a second job as a barman at weekends, hoping that his wages and tips will help him make up some of the shortfall. His daughter Christina, 15, has given up her $70 a month piano lessons.
"What hurts the most is that as a family we have little debt, just two small car loans. We've been good with our money, we've budgeted and we don't live beyond our means, but we could lose the house we've worked so hard for."
John Devaney is also feeling the squeeze, but his economising is on a rather different scale. His 124-foot yacht is up for sale, priced at $23.5 million. He's having to sell his house, too, a 16- bedroom, $16 million affair in Colorado, although he has two others.
He may even have to sell some of his Renoir collection as he desperately tries to pump money into his hedge fund, United Capital Markets.
The fund specialised in buying and selling bonds that are ultimately based on the mortgage payments of people like the Montes family.
Although he ultimately profited from Mr and Mrs Montes, he didn't think a lot of them.
"The consumer has to be an idiot to take on those loans," he said earlier this year. "But it has been one of our best-performing investments."
So precisely what is it that links the modest Montes family and Mr Devaney's Icarus-like story of fantastic wealth?
Once, when a bank like Wells Fargo lent money to people like the Montes family, it carried the liability itself, holding enough cash in its reserves to cover its losses should the clients default and the loan have to be written off.
That was because "subprime" debts were difficult to sell on to the money markets. The pension funds and other traditional investors who are normally happy to lend cash up-front to finance a mortgage in exchange for a steady stream of future repayments, couldn't touch the subprime market.
Underwriting such loans was regarded as too risky for conventional funds. Commonly, pension funds and the like are tightly restricted as to where they can invest. Only if a loan was given a high, reliable rating by an independent ratings agency could the funds invest. Even the big investment banks would steer clear of underwriting subprime loans: too much risk, not enough gain.
If only the mortgage firms could sell their loans on: then they'd have to carry less cash in reserve and could make more loans to more customers.
As so often in high finance, a combination of greed and ingenuity lead to an answer: collateralised debt obligations (CDOs). The arcane name hides a - relatively - simple idea. Instead of selling the sub-prime loans on to other investors in a single piece, why not chop them up and sell the fragments to a number of investors? When the fragments were mixed up with pieces of more secure loans from more reliable lenders than the Montes family, you could create a loan package.
Of course, you need someone very clever to help with the chopping up and the tracking of who owed what to whom for each package. Enter the investment banks that dominate Wall Street, the masters of the universe who saw a chance to earn fat fees brokering CDOs, pricing them and selling them on to investors. And when Wall Street sees a chance to make money, it seizes it. In 2004, $157 billion of CDO packages were issued. By last year, that was $489 billion.
The attraction for investors was that they could get higher returns from borrowers like the Montes family paying a "risk premium" for their lowly status, but still have the assurance of a decent rating on the loan from the credit ratings agencies. And the agencies were happy to oblige, giving many of the complex loan packages their seal of approval, a judgment that has since returned to haunt them.
But to use an analogy popular among financial analysts trying to explain the current situation, imagine a butcher making sausages. He starts with a dozen pork fillets. Eleven are prime meat; one is rotten. All 12 are thrown in the grinder and made into sausages - so everyone who eats a sausage ends up swallowing a little bit of rotten meat.
This year, as people like the Montes family have found it ever tougher to keep up their loan repayments, more and more of the CDO packages have been turning bad.
For the last few weeks, a number of banks and investment houses have been becoming sick, poisoned by the bad bits of the loan packages they have swallowed. Even those who remain healthy are under suspicion, with financial analysts holding their breath as they wait to see who will come down with something nasty next.
It is that fear of contagion that has gripped stock markets worldwide this week. And despite yesterday's temporary respite, no one is betting that the infection has yet run its course.