8Failure of the Rating Agencies: The Subprime Mortgage Market and Its Impact on Capital Markets
ONE OF THE FIRST WARNING SIGNALS LEADING TO THE FINANCIAL crisis of 2008 was turmoil in the subprime mortgage market. Prices of residential mortgage-backed securities (RMBS) had already begun dropping sharply in 2006 along with home prices. A substantial volume of subprime mortgages had been securitized by investment banks and sold into the investment portfolios of pension plans, bond funds, and banks all over the world. Some of the highly rated subprime mortgage bonds started to default as the real estate markets began to deflate. It quickly became clear that the default rates on these subprime mortgages were going to be much higher (worse) than ...
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