Randall Dodd and Paul Mills outbreak : u . s . subprime contagion

any of the myriad problems in the u.s. mortgage market could have been contained, but together they caused a crisis that spread across the globe T HE causes of the crisis in subprime mortgages have become clear. They started with poor underwriting practices, which became legion. But damage was propagated at each stage of the complicated process in which a risky home loan was originated, then became an asset-backed security that then formed part of a collateralized debt obligation (CDO) that was rated and sold to investors. What is not so clear, though, is how these losses could spread to other parts of the global financial system. Like an epidemic in which an invisible virus infects many people and communities, the financial crisis spread when losses to intermediaries in one nontransparent market raised concerns about liquidity and solvency elsewhere. Just as diseases are passed on by close human contact, pests, and contaminated food, so this financial crisis has been transmitted through connected markets and institutions while leaving others largely untouched. We examine the origins of the subprime crisis and the various places, some of them surprising, where the effects of the crisis have been found—such as markets in which banks make loans to one another, short-term commercial paper, and even municipal bonds.