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THE BUST 

Impaired Securities
Impairment of 2005-2007 vintage mortgage-backed securities (MBS) and CDOs as
of year-end 2009, by initial rating. A security is impaired when it is downgraded to
C or Ca, or when it suffers a principal loss.

IN BILLIONS OF DOLLARS

$1,000

Not impaired
800 Impaired

600

400

200

0
Aaa Aa thru B Aaa Aa thru B Aaa Aa thru B
Alt-A MBS Subprime MBS CDOs
SOURCE: Moody’s Investors Service, “Special Comment: Default & Loss Rates of Structured Finance Securities:
1993-2009”; Moody’s SFDRS.

Figure .

minent or had already been suffered—by the end of  (see figure .). For the
lower-rated Baa tranches, . of Alt-A and . of subprime securities were im-
paired. In all, by the end of ,  billion worth of subprime and Alt-A tranches
had been materially impaired—including . billion originally rated triple-A. The
outcome would be far worse for CDO investors, whose fate largely depended on the
performance of lower-rated mortgage-backed securities. More than  of Baa CDO
bonds and . of Aaa CDO bonds were ultimately impaired. 
The housing bust would not be the end of the story. As Chairman Bernanke testi-
fied to the FCIC: “What I did not recognize was the extent to which the system had
flaws and weaknesses in it that were going to amplify the initial shock from subprime
and make it into a much bigger crisis.” 