How “investment” instruments that were allegedly designed to spread the risk ended up spreading the poison. From the Wall Street Journal via BooRadley at The Seminal:
“Even at its peak, subprime lending accounted for a relatively small portion of overall mortgage lending. Yet losses from these mortgages caused deep damage to the financial system.
Now, documents released by Senate investigators last week provide clues in understanding why the losses were so severe. The documents show how Wall Street banks packaged and repackaged the same risky bonds into securities that ultimately helped magnify the impact of defaulting subprime mortgages on the financial system.
In one case, a $38 million subprime-mortgage bond created in June 2006 ended up in more than 30 debt pools and ultimately caused roughly $280 million in losses to investors by the time the bond’s principal was wiped out in 2008, according to data reviewed by The Wall Street Journal….
In effect, the documents said, Wall Street was “copying and pasting” what turned out to be the worst-performing securities of the mortgage boom. Such activity helped multiply opportunities for hedge funds and traders who wanted to short the housing market, but magnified the losses of those on the other side of the trades.”
In graph form: