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THE BUST 

ported about  billion in Level  assets, against capital of  billion; and Goldman
reported about  billion, and capital of  billion.
Mark-to-market write-downs were required on many securities even if there were
no actual realized losses and in some cases even if the firms did not intend to sell the
securities. The charges reflecting unrealized losses were based, in part, on credit rat-
ing agencies’ and investors’ expectations that the mortgages would default. But only
when those defaults came to pass would holders of the securities actually have real-
ized losses. Determining the market value of securities that did not trade was diffi-
cult, was subjective, and became a contentious issue during the crisis. Why? Because
the write-downs reduced earnings and capital, and triggered collateral calls.
These mark-to-market accounting rules received a good deal of criticism in re-
cent years, as firms argued that the lower market prices did not reflect market values
but rather fire-sale prices driven by forced sales. Joseph Grundfest, when he was a
member of the SEC’s Committee on Improvements to Financial Reporting, noted
that at times, marking securities at market prices “creates situations where you have
to go out and raise physical capital in order to cover losses that as a practical matter

were never really there.” But not valuing assets based on market prices could mean
that firms were not recording losses required by the accounting rules and therefore
were overstating earnings and capital.
As the mortgage market was crashing, some economists and analysts estimated
that actual losses, also known as realized losses, on subprime and Alt-A mortgages

would total  to  billion; so far, by , the figure has turned out not to be
much more than that. As of year-end , the dollar value of all impaired Alt-A and
subprime mortgage–backed securities total about  billion. Securities are im-

paired when they have suffered realized losses or are expected to suffer realized
losses imminently. While those numbers are small in relation to the  trillion U.S.
economy, the losses had a disproportionate impact. “Subprime mortgages themselves
are a pretty small asset class,” Fed Chairman Ben Bernanke told the FCIC, explaining
how in  he and Treasury Secretary Henry Paulson had underestimated the
repercussions of the emerging housing crisis. “You know, the stock market goes up
and down every day more than the entire value of the subprime mortgages in the
country. But what created the contagion, or one of the things that created the conta-
gion, was that the subprime mortgages were entangled in these huge securitized
pools.” 
The large drop in market prices of the mortgage securities had large spillover ef-
fects to the financial sector, for a number of reasons. For example, as just discussed,
when the prices of mortgage-backed securities and CDOs fell, many of the holders of
those securities marked down the value of their holdings—before they had experi-
enced any actual losses.
In addition, rather than spreading the risks of losses among many investors, the
securitization market had concentrated them. “Who owns residential credit risk?”
two Lehman analysts asked in a September  report. The answer: three-quarters
of subprime and Alt-A mortgages had been securitized—and “much of the risk in