What Caused the Housing Bust (13)

Liquidity fears began


With Wall Street wrapping together thousands of mortgages from different underwriters, it's likely that hundreds of financial institutions around the world have traces of bad subprime and Alt-A mortgage debt on their books.

Parts of these CDOs were rated AAA.

Almost any financial institution could own them – especially hedge funds.

Hedge fund investors quickly figured this out – and asked for their money back.

And so, in July, liquidity fears began to creep through the entire mortgage complex.

Not because the mortgages themselves were all bad or even because the mortgage securities were all bad –

but because all the market players knew a wave of selling, led by hedge funds, was on the way.

Nobody wants to be the first buyer when they know thousands of sellers are lined up behind them.



By Porter Stansberry