[macker]

Originally Posted by Flames Fan, Ph.D.

This is the most thorough treatise that I've read.

Bottom line is that F&F's portfolio had default rates well below that of subprime loans, which is probably the bigger factor. Also, just in magnitude, what F&F held could not create that large a meltdown. The highly leveraged, private securitization CDO / CMO market that companies like AIG were mired in was large enough in magnitude, and based on a shaky enough loan portfolio, that it clearly spurred the whole mess.

If anybody is interested in the securitization and the leveraged bets from private companies that was responsible for the melt down, I would recommend Yves Smith's Econned or even go as far back as Liar's Poker to see how this all started. Econned is heavy but it makes it clear how the CDOs created in the secondary market from crappy MBS tranches. Taibbi's last book spells out, in an easy to read format, the garbage that AIG was creating.

Or "The Big Short" where it is pointed out how AIG a tripple A rated Insurance company was not subject to bank regulation and large reserve assets and that it could have also been GE or Berkshire Hathway but that AIG just got there first. AIG became the worlds biggest owners of subprime mortgage bonds. For a few million dollars per year AIG took on the very real risk that 20 billion could just go poof. Those who shorted were basically buying fire insurance on a slum with a history of burning down. The rating agencies didn't have a CDO model. AIG was effectively long 50 billion in tripple B subprime mortgage bonds masquerading as tripple A as Moodys and S&P had both rated the stuff tipple A. How could subprime loans be rated AAA....bingo there is your big short. Another great book from Michael Lewis.