One point that seems to be overlooked here is that at least some “AAA” rated securities are rated that highly only because of the “insurance” that is sold by insurance companies such as MBIA and MGIC. Those insurance companies have “guaranteed” debt amounting to more than 100 times their capital, so if they have even a few big losses, they will be insolvent. This will immediately lower the ratings on the “guaranteed” bonds they have “insured” to their underlying ratings, which are usually much worse. This will in turn cause a cascade of selling by mutual funds that can’t hold low-rated debt.
I don’t know if this applies to the specific funds you are referring to here, but the very possibility of such a disaster is enough for me to have already made sure that my mother doesn’t have any “asset-backed” securities in her portfolio.
