so what really happened?
1. Subprime loans were made to folks who never should have gotten them - sub par FICO scores, no income, no doc, 0% down... comon!! (2006 vintage was esp bad - you know, like rotten wine)
2. Home prices (on a national level) nose-dived for the first time since great depression - leading to massive defaults. Why does the subprime guy care - he leaves the keys with the bank and drives away in his truck - his home just lost 10$ of value - he has -ve equity, and he cannot refinance!
3. HEL deals had a capital strcuture - 0-5% equity, and above it sat the ignominious BBB- bond!! (ah here comes the catch). The losses (historically below 5% were now being projected in the 10 to even 15% range. The BBB- bonds were toast...
4. All this would have been still ok - i mean about 30bn losses...
5. But enter the ABS CDO market (a 250 bn issuance market), which recycled the BBB- bonds into another tranched product - if your underlying bonds are toast - guess what happens to even highly rated tranches? Result- ABX indices skydive like there is no tomorrow. (go to Markit website..)
6. Who's to blame - i think... the rating agencies (who made a bundle before all this mess).