As for the commercial banks and investment banks, they did what they've done for decades - put the safest, most liquid securities onto their balance sheets - i.e. mortgage backed securities. You can argue that the leverage ratios should not have been allowed to increase (i.e. $1 of assets supporting "X" amount of borrowing). However, the point of the collapse is that, due to the high concentration of sub-prime mortgages and the accelerating default rates, what was a very safe, highly liquid security now has no value and no market.
And yet the mortgage market cratered under the load of a large number of bad loans. Either those few bad apples worked really hard, or there were a lot more than a few of them.
However, the point of the collapse is that, due to the high concentration of sub-prime mortgages and the accelerating default rates, what was a very safe, highly liquid security now has no value and no market.
This contradicts what you said before. Clearly the basis for those "safe, liquid securities" was false to begin with -- as shown by the '99 NYT article that JimRob posted the other day. It was obvious even then that the "safety" of those investments was illusory: "In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's."