How did the problem spread from subprime lenders into the rest of the financial world?
Many of the companies that were making the subprime loans weren’t holding onto the loans, but instead sold them to other parties, including hedge funds and pension funds looking for higher returns. Often, the loans were packaged together (think of a mutual fund holding thousands of individual loans) and sold to investors. When those loans started going bad, suddenly lots of people all across the financial world were affected. Concerned about losses, investors and lenders started demanding higher interest rates to make loans, or stopped doing so entirely. Thus began the credit crunch. From consumers, who are finding mortgages have now become more expensive and tougher to get, to massive buyout funds such as Kohlberg Kravis Roberts & Co., which are having to pay more for loans to carry out takeovers, tougher credit terms are slowing purchases and that’s slowing the economy and hurting stocks. The latest problem has surfaced in the asset-backed commercial paper market.
