Mike the Usurper wrote:
Fannie and Freddie gravitated to the securities as yields on agency mortgage bonds often fell below the cost of selling their debt. In 2006, AAA rated securities backed by subprime or second mortgages averaged 0.57 percentage points more than U.S. Treasuries, according to Lehman Brothers Holdings Inc. index data. That compares with 0.48 percentage points for fixed-rate agency mortgage securities.
Understanding this one takes a little understanding leap. Fannie and Freddie buy mortgages. What we didn't know was they were also buying mortgage backed securities or in this case, bonds backed by the same mortgages they'd already bought! There ain't no fixin' this one. They bought the same bad mortgages. TWICE!
That's why the best explanation of this whole mess I've heard came from a Vandy prof in economics: "It's a little bit like mad cows diseases for financial instruments."
