Reforming Credit | The American Prospect

Reforming Credit | The American Prospect: "he retail abuses were connected to the wholesale collapse most explicitly through the whole sub-prime loan system: Mortgage companies marketed loans to moderate-income consumers on terms that would become unaffordable after a brief period of 'teaser' rates. These retail loans were connected to the wholesale part of the system through an elaborate web of overlapping relationships. The mortgage companies were bankrolled by big Wall Street investment banks; the loans were bundled into high-risk securities; packages of those securities were then blessed with triple-A ratings by corrupt rating agencies; big commercial banks bought some of the securities through off-balance-sheet affiliates; and some of these securities were insured by firms like AIG. When the retail loans began going bad, the entire system collapsed, bringing down the giant banks and investment banks whose bets on these loans were very highly leveraged. The sub-prime circuit provides a snapshot of the rot in the entire system."