[heifetz]

The derivatives were created and rated on the assumption that the borrower's default rates were consistent with historical default rates. Of course that was not the case, and losses became multiples higher, and blew up derivatives that were highly levered. However, derivatives didn't cause the losses, borrowers defaulted!

[DeonPenny]

Derivatives did cause the loses basically for what you said above.

>derivatives were created and rated on the assumption that the borrower's default rates were consistent with historical default rates.

The historical information was wrong because the issuer of the subprime loans hid bad loans given to people with thin credit histories.

[unclebucknasty]

Well, sure, we can play the chicken-and-egg game and posit that if they'd never defaulted, the house of cards would've remained standing.

But, that's the not the predominant issue for many reasons, some of which are embedded directly in your statements. For example:

>rated on the assumption that the borrower's default rates were consistent with historical default rates

Why would they be rated as such if the viability of the underlying mortgages was not, in aggregate, consistent with those that produced the historical rates?

That alone tells the story.

The derivatives drove the outsized lending which ballooned the number of riskier subprime mortgages in the first place. Then, the many layers of leverage just exacerbated the problem.

At the end of the day, increases in subprime loan defaults could have been weathered. The derivatives were responsible for turning a containable downturn into a full-blown crisis.