A CPA targeted for assassination explains to his friends: “Look, that hedge fund invested in tiered mortgage backed securities, meaning that they would buy a bundle of mortgages with different risk ratings. Most would be at the AAA level, or what the ratings companies would call the lowest risk, but then company would have tiers at the AA, A, BBB. After that, anything else is classified as junk or non-investment grade, and many mutual funds and hedge funds have rules about owning junk. But what the market is now seeing is that even liabilities rated AA or A are having the same default rates that were expected for securities that were considered CCC, not just junk, but really bad junk.” (Pg. 82)
Securities markets around the world are having this problem. Even AA securities are probably only worth 70% of the book value, which means that if your hedge funds are leveraged at more than five to one, they are worthless.
What about insurance? Well, there are only two major companies insuring such debt. If they have a trillion dollars in defaults claimed? Such companies only have a few billion in reserves. They’re wiped out.