The $6 trillion U.S.
mortgage-backed
securities (MBS)
bubble was created by Sir Alan Greenspan at the Federal Reserve, to replace his 1990s Y2K stock bubble with an even bigger one. But after 2004, issuance of these securities to U.S. and UK-based
banks stopped growing and actually fell. The more "toxic" and leveraged these "structured credit products" were with debts destined to default, the more they were rated "AAA" and "AA" by the credit ratings agencies led by Standard and Poor''s. They were
bought by Chinese and Taiwanese government and
private banks, Korean, German, and French banks, and Japanese banks and funds, which had excess liquidity to keep
buying them. These bank and fund investors gave standing orders to buy any U.S. security with an "AAA" rating. Central banks and private banks in China, Japan, and Korea hold over 10% of all U.S. residential MBS, most of it bought in the past three years; and major European banks, an even larger percentage. When Standard and Poor''s, et al. were forced to start downgrading some of these "structured products," mass selling started, which triggered mass loss in value of the instruments, and panic. And now this 10-cents-on-the-dollar "worldwide horror show" is hitting, disproportionately, banks in Continental Europe and Asia. As just one of the latest examples, Germany''s Commerzbank and Deutsche Bank are exposed as the biggest creditors of Homebanc, the U.S. mortgage-lending company which has just defaulted on its securities. Just as the Fed has been buying MBS from U.S.-based banks as a bailout measure since Aug. 8, so also has the ECB been buying U.S. MBS from European banks, but on a ten-times largers scale. This is a major European banking crisis looming now because of this and related categories of investment in the securities of the U.S. mortgage bubble.
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