The lack of transparency in bundled mortgages made it difficult to know how many subprime loans were inside. Therefore, all mortgage securities were treated as toxic. Investors avoided all mortgages to prevent accidentally buying subprime.
It's like the adage: "One bad apple spoils the barrel." So it was with subprime spoiling the entire mortgage market.
New accounting rules designed for liquid markets now began to put the squeeze on banks even though more than 90 percent of Americans are still paying their mortgages.
Despite nearly a year of promises, after the markets closed, the government reversed its position. It would not provide the same backstop as Bear Stearns to Lehman Brothers, an investment bank with positive net assets of $26 billion. It forced a company that was "A" rated on a Friday to file bankruptcy the following Sunday.
Panic gripped the financial markets. The forced bankruptcy of Lehman destroyed insurance company AIG's balance sheet. As fear ravaged investment portfolios, the government reversed itself again. It seized control of AIG, nationalizing it and pouring in $85 billion. By week's end, the government had spent more money trying to contain the firestorm it unleashed by reneging on Lehman than it would have cost to support its sale.
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