What Caused the Housing Bust (10)

Mortgage securities collapsed


Since Dillon Reed Capital, dozens of more funds have blown up as the "equity slice" in mortgage securities collapsed.

Remember, these equity tranches were supposed to be the "speed bumps" that protected the rest of the buyers.

With the safety net of the equity tranche removed, these huge securities will have to be downgraded by the rating agencies.

For example, on July 10, Moody's and Standard and Poor's downgraded $12 billion of subprime-backed securities.

On August 7, the same agencies warned that another $1 billion of "Alt-A" mortgage securities would also likely be downgraded.

Now... these downgrades and hedge-fund liquidations have hugely important consequences.

Why? Because as hedge funds have to liquidate, they must sell their RMBSs, CDOs, and ABSs.

This pushes prices for these securities down, which results in margin calls on other hedge funds that own the same troubled instruments.

That, in turn, pushes them to sell, too.


By Porter Stansberry