"NO ONE COULD'VE PREDICTED"

That's one of the lines the MOTU use when describing the run-up to the Big Shitpile. It's not true, of course, but it does give the casual reader the sense that the Collapse was some sort of Act of God, kind of like a lightning strike. One person who did catch this VERY early on was Eugene Park of AIG. In the fall of 2005, he started to get worried:

He was worried about the subprime component of the CDO market. He had examined the annual report of a company involved in the subprime business. He was stunned, he told his colleagues at the time.

The subprime loans underlying many CDOs formed too large a part of the packaged debt, increasing the risk to unacceptable levels. Those loans could default at any time, anywhere across the country because the underwriting processes had been so shoddy. The diversification was a myth -- if the housing market went bust, the subprimes would collapse, like a house of cards.

Cassano decided it was time to stop. Gorton explained the decision to investors during the December 2007 webcast: "We stopped writing this business in late 2005 based on fundamental analysis and based on concerns that the model was not going to be able to handle declining underwriting standards."

By then, the firm had $80 billion worth of existing CDOs that included subprime mortgages as underlying assets.