Paul A. Rahe's comment is correct that there were several different categoies of nad loans--subprime taken taken out by people who didn't have the resources to pay, Alt-A by people who had the resources, but wanted use them to invest in the stock market instead of a downpayment on a house, Alt-A by people who were borrowing on their home to take vacations or grow their business, and Alt-A by people who just didn't have the downpayments. There isn't sufficient data to determine how many people were in each category, but half of all mortgages, 27 million loans, were in one of these categories and over two thirds of these were on the books of government agencies or organizations like banks required to make these weak loans by government policies. It probably doesn't matter how many we in each category--the default rates were unprecedentedly high for all subprime and all Alt-A, and that's what caused the financial crisis.

 There are a few comments I'd like to respond to. # 13 from BThompson notes that I said Lehman failed and could not meet its CDS obligations. True, but my point was that Lehman's failure--and its consequent inability to meet its CDS obligations--did not cause any other firnm to fail, proving that CDS did not create the "dangerous interconnections" that the government told us were the reason they had to save AIG and Bear. Lehman failed not because it had CDS obligations--those only mature, like an insurance policy, when the losses they are insuring against actually occur--but because of all the bad mortgages and MBS they were holding. AIG could also have been allowed to fail, but the government panicked.

The idea expressed in # 9 by BThompson is also, I think, misplaced. No one who knew anything about the CDS market really thought that CDS obligations were a problem. All market participants except AIG were hedged, and in any event many of the losses had not actually occurred. Almost all the losses that were being "recognized" in 2008 were accounting losses, coming from the requirement for marking securities assets to market.

 If I want to sell a stock because I think it is going down, the person who buys it is speculating that it will go up. It's difficult for me to see what people have against speculation. It is essential to markets. The same thing happens in the credit default swap market. When someone who is hedging a risk buys protection from someone who is selling protection, the seller of protection is speculating. If there were no speculator (such as the seller of the protection) there wouldn't be a market. There is no such thing in the credit default swap market as empty or meaningless selling or buying. Everyone in the market is doing one or the other because he believes that there is a profit in it. The buyer of protection pays the seller for it, just like in an insurance market, and if the risk turns into an actual loss, the seller of protection pays up. Neither of them was "speculating" in the sense that they were doing something that had no economic consequences or no "constructive purpose.".