So someone borrowed money on bonds used to borrow money.
Is there any real money left in the world?
The problem with this situation though is that, since these bonds were collateralized by different pieces of other bonds - making it difficult to really figure out what the quality of the collateral was/is. There was an odd rating agency practice of assuming that a basket of, say, AA rated pieces could be combined to become AAA rated in the new package. Since higher rated securities pay lower yields to the purchasers, this practice allowed the sellers/packagers to make a little more price spread improvement for themselves.
That’s not what is really going on there.
The security that MBIA has is a “CDO made up of other CDO’s” - or, what is called a “CDO squared” in the finance industry.
http://www.housingwire.com/wp-content/uploads/2007/12/cdo-squared_nomura.pdf
A lot of people aren’t really “getting” the real scope of the financial market’s debt crisis because they don’t understand the actual instruments involved that are blowing up. The press keeps talking about only sub-prime mortgages; what folks need to understand is that with CDO’s, CMO’s, etc, these sub-prime mortgages have been diced, sliced and combined with other grades and maturities of debt, along with some derivatives and covenants and then sold as “AAA” or similar highest-quality debt.
The reason why the ratings agencies gave such absurdly high ratings to these CDO’s was that the ratings agencies didn’t understand the mathematics behind these synthetic securitized debt instruments.
CDO squareds take this to a whole new level of mathematical obfuscation.