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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

these securitizations is in the investment-grade securities and has been almost en-

tirely transferred to AAA collateralized debt obligation (CDO) holders.” A set of
large, systemically important firms with significant holdings or exposure to these se-
curities would be found to be holding very little capital to protect against potential
losses. And most of those companies would turn out to be considered by the authori-
ties too big to fail in the midst of a financial crisis.
The International Monetary Fund’s Global Financial Stability Report published in
October  examined where the declining assets were held and estimated how se-
vere the write-downs would be. All told, the IMF calculated that roughly  trillion
in mortgage assets were held throughout the financial system. Of these, . trillion
were GSE mortgage–backed securities; the IMF expected losses of  billion, but in-
vestors holding these securities would lose no money, because of the GSEs’ guaran-
tee. Another . trillion in mortgage assets were estimated to be prime and
nonprime mortgages held largely by the banks and the GSEs. These were expected to
suffer as much as  billion in write-downs due to declines in market value. The
remaining . trillion in assets were estimated to be mortgage-backed securities and
CDOs. Write-downs on those assets were expected to be  billion. And, even
more troubling, more than one-half of these losses were expected to be borne by the
investment banks, commercial banks, and thrifts. The rest of the write-downs from
non-agency mortgage–backed securities were shared among institutions such as in-
surance companies, pension funds, the GSEs, and hedge funds. The October report
also expected another  billion in write-downs on commercial mortgage–backed
securities, CLOs, leveraged loans, and other loans and securities—with more than
half coming from commercial mortgage–backed securities. Again, the commercial
banks and thrifts and investment banks were expected to bear much of the brunt. 
Furthermore, when the crisis began, uncertainty (suggested by the sizable revi-
sions in the IMF estimates) and leverage would promote contagion. Investors would
realize they did not know as much as they wanted to know about the mortgage assets
that banks, investment banks, and other firms held or to which they were exposed. To
an extent not understood by many before the crisis, financial institutions had lever-
aged themselves with commercial paper, with derivatives, and in the short-term repo
markets, in part by using mortgage-backed securities and CDOs as collateral.
Lenders would question the value of the assets that those companies had posted as
collateral at the same time that they were questioning the value of those companies’
balance sheets.
Even the highest-rated tranches of mortgage-backed securities were downgraded,
and large write-downs were recorded on financial institutions’ balance sheets based
on declines in market value. However, although this could not be known in , at
the end of  most of the triple-A tranches of mortgage-backed securities have
avoided actual losses in cash flow through  and may avoid significant realized
losses going forward.
Overall, for  to  vintage tranches of mortgage-backed securities origi-
nally rated triple-A, despite the mass downgrades, only about  of Alt-A and  of
subprime securities had been “materially impaired”—meaning that losses were im-