This is the paper to read

SSRN-The Subprime Panic by Gary Gorton

ABSTRACT

Understanding
the ongoing credit crisis or panic requires understanding the designs
of a number of interlinked securities, special purpose vehicles, and
derivatives, all related to subprime mortgages. I describe the relevant
securities, derivatives, and vehicles to show: (1) how the chain of
interlinked securities was sensitive to house prices; (2) how
asymmetric information was created via complexity; (3) how the risk was
spread in an opaque way; and (4) how trade in the ABX indices (linked
to subprime bonds) allowed information to be aggregated and revealed.
These details are at the heart of the origin of the Panic of 2007. The
events of the panic are described.

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