Both banks had ploughed gleefully into collateralised-debt obligations (CDOs), which pool mortgage-backed securities and other credit instruments, becoming the top two underwriters in the business.
Then the analysts reassessed the weighted average loan-to-value ratios of the pools' mortgages.
As the housing market inflated, banks pooled mortgages, many of them to shaky borrowers, and packaged them into complex collateralized debt obligations, or C.D.O.'s.
After taking a generous fee for originating the loans, they planned to sell them to Wall Street banks, such as Merrill Lynch and Goldman Sachs, which were in the business of pooling mortgages and using the monthly payments they generated to issue mortgage bonds.
Starting in 2006, America suffered a nationwide house-price slump.The pooled mortgages were used to back securities known as collateralised debt obligations (CDOs), which were sliced into tranches by degree of exposure to default.
And as changes to the nation's health systems are phased in, such innovations might even help hold down the cost of insurance for consumers, much as selling pooled mortgages to investors has made buying a home less expensive.
Today American banks sell mortgages in the secondary mortgage market, mainly to two government-sponsored agencies, the Federal National Mortgage Association (affectionately known as Fannie Mae) and the Federal Home Mortgage Loan Corporation Freddiee Mac), which finance their purchases by issuing bonds or by pooling mortgages and selling them as mortgage-backed securities.
Why that represents such a dramatic tightening is that Fed Chairman Ben Bernanke has been buying up 90% of all newly created pooled mortgages, according to the St. Louis Federal Reserve.
In 2011, A.I.G. tried to buy back the entire pool of mortgage securities from Maiden Lane II, but its offer, about $15 billion, was rejected.
mortgage, you have a $500 billion pool of mortgages.
A mortgage-backed security is a bond backed by an underlying pool of mortgages.
