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The theory of how the financial system created AAA-rated assets out of subprime mortgages

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This diagram is from a 2008 IMF report and was included at the Financial Crisis Inquiry Commission website.

The diagram shows how mortgages were combined into pools and rights to the cash flow from these mortgages sold to investors via residential mortgage-backed securities (RMBS). High-risk RMBS securities were purchased by legal entities called collateralized debt obligations (CDO) which issued another layer of securities to investors.

Click on the diagram for a larger version in a new window.


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