the two real problems, were, 1) when the junk and Alt-A mortgages were packaged and sold, private insurance, freddie/fannie too, was often purchased to increase the Rating of the pool, when defaults happened with the right timing the insurers could not stand behind the pool of insurance, and mainly 2) The Broker/ Banks and their related investment and hedge funds were leverage 20;1 and 30;1 holding and trading the securities resulting from the CMO and CDO tranches.
It was the 20:1 leverage in reverse that made their equity negative in accounting terms, thus making them insolvent in Sept. 08 through Jan.09.
We should have let them fail. It would have purged the system, and there would have been even more fire sale deals for the investors to buy or let die.
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