How the Mortgage [U.S.Sub-prime] Crisis Arose and Infected the World

 The slide started innocuously in April after New Century Financial, a mortgage lender whose principle borrowers were Americans with less-than-stellar credit, filed for bankruptcy protection.

Its customers were people who may have been late on credit card payments, maybe even filed bankruptcy in the previous years, but still wanted that shot at the American dream: a home of one's own.

Lenders, flush with cash and eager to exploit new markets so they could, in turn, lend more money and increase their profits, were only too happy to oblige.

Hedge funds and banks worldwide saw a market flush with opportunity and took their fill, buying mortgage-backed securities to bolster their own bottom lines.

A month later, USB AG, the giant financial company, said its hedge fund business had lost 150 million Swiss francs in the first quarter largely on the back of investments it made in the U.S.subprime mortgage fieldd. Then in July, Wall Street's Bear Stearns closed a pair of hedge funds after it lost more than US$20 billion on mortgage-backed investments.

The company called them isolated incidents, trying to dismiss their importance but investors weren't convinced and its shares slid, resulting in the dismissal of co-chief operating officer Warren Spector.

Markets came to head late last month and early in August as concern mounted that those mortgage securities may not have been as firm as people thought. It was capped by the August 6 bankruptcy by Melville, N.Y.-based American Home Mortgage Investment Corp.

American Home, once the nation's 10th largest mortgage lender, said it fell victim to "extraordinary disruptions" that effectively cut off the funding it needed to make new loans. Falling U.S. home prices and a spike in payment defaults scared investors away from mortgage debt, including bonds and other securities backed by home loans.

By then, banks worldwide were looking at their portfolios and finding sizable exposure and hedge funds were closing down in a bid to stave off investors who wanted to redeem their stakes, essentially, a modern day run on a bank.

On Thursday, France's biggest bank, BNP Paribas, froze US$2.2 billion held in three funds because their exposure to subprime prime mortgages in the U.S. solidified fears that risk was spreading worldwide.

With cash reserves running low, banks were refusing to lend to each other and the interest rates that banks charged each other rose well above the 4 percent level set by the ECB, prompting its unprecedented injections on Thursday and Friday, followed in part by the U.S. Federal Reserve and central banks in Asia, too.