Having worked in the insurance business for 23 years, I learned long time ago, eventually the very disaster the company writes insurance for will occur. Eventually, somebody is going to pay.
The true thieves in the subprime mortgage debacle are the mortgage brokers. As they were manipulating the data on the mortgage applications, they knew these folks couldn't afford to make the payments.
Paul Krugman is dead on:
But the securities were never as safe as advertised, because the risk transfer wasn’t anywhere near big enough to protect investors from the consequences of a burst housing bubble. It’s not quite the metaphor I would have come up with, but here’s what the legendary bond investor Bill Gross had to say about C.D.O.’s in Pimco’s latest “Investment Outlook”:
“AAA? You were wooed Mr. Moody’s and Mr. Poor’s by the makeup, those six-inch hooker heels, and a ‘tramp stamp.’ Many of these good-looking girls are not high-class assets worth 100 cents on the dollar.”
Now we’re looking at huge losses to investors who thought they were playing it safe. Estimates of the likely losses on C.D.O.’s range from $125 billion to $250 billion, with some analysts warning that a wave of distress selling will deepen the housing slump even further.