To anyone who was watching, it was obvious that there were too many adjustable rate loans made to people with insufficient down payments, bad credit, and low income.
All that was necessary for the cave-in was a sustained increase in short-term interest rates. The idiot Greenspan provided the impetus when in 2004 he started raising Fed Funds from 1% to 5.25%.
By the time it was over, all the mortgage insurance companies were destroyed, as were Fannie and Freddie, the mortgage market was in ruins, CDS issuers were bankrupt, and the economy was collapsing.
* * * * * J B K * * * * *
San Francisco
"Our newest and largest [short] investment is on an extremely highly levered, yet AAA-rated financial institution, which we believe has inadequate reserves, undisclosed credit- quality problems, aggressive accounting and substantial unconsolidated indebtedness contained in off-balance-sheet special-purpose vehicles," he wrote. The position had the potential to generate a return of about five times the fund's total assets if it was successful.
Though little known outside of Wall Street circles in 2002, MBIA ranked as one of the five biggest financial institutions in the country in terms of outstanding credit exposure. It shared that distinction with Bank of America Corp., Citigroup Inc. and government-sponsored mortgage lenders Fannie Mae and Freddie Mac.
http://www.bloomberg.com/apps/news?pid=20601108&sid=aLmOb9zzVZ9A
