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Credit Downgrades of Mortgage-Backed Securities, by Month, 2008

"The significance of credit downgrades was that they forced leveraged banks that had taken loans to buy mortgage-backed securities either to pay off those loans or to post additional collateral with their creditors. This was because most of their loans contained covenants that required them to increase their capital investment if bond prices fell or the credit rating on the MBS collateral was downgraded. The problem, however, was that most banks were already very highly leveraged and eventually found it impossible to raise enough capital to cover their loans. This was the link between the implosion in the mortgage market and the freezing of the credit system."—p. 43, The Great Recession



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