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There isn't but that is largely because the [general points] are popularly known: 1) Politically, at the Federal level, steps were taken to regularly increase

There isn't but that is largely because the [general points] are popularly known: 1) Politically, at the Federal level, steps were taken to regularly increase subsidies to the housing market. It was a populist position in both parties so it seemed safe from serious intervention that would depress prices. 2) Housing had been increasing for some time and this upward momentum "seemed" safe in the general case where the borrowers were credit worthy. In the long term, housing has always gone up decade-over-decade at least as fast as inflation. 3) Housing demand is rock solid, even in times of crisis, so the fluctuations would be less severe than the surrounding environment. In other words, they had always assumed they could find buyers for housing in any market environment so the hits they took in a recession would be small. 4) Subprime being a vector for a contagion that would affect middle class homeowners and cripple the economy didn't occur to them. As such, risk was effectively mispriced even tho the banks [frankly] were and still are aware that the Credit Agencies are really captured by the large financial institutions. They had assumed that "AAA" would remain relatively safe. 5) The institutions themselves didn't really understand that the grading mechanisms for credit were so badly corroded by corruption to be essentially worthless in the housing market until the damage was so severe that all they could do was unload the toxic assets before other people realized they were toxic. The only people who could buy these at scale were other banks and financial institutions...

Lazare 11y ago
Parts of that is right, but I think you mis-state a lot of the ratings stuff. The fundamental idea behind the ratings is (simplifying a lot) that you could take a lot of crap mortgages and then slice them into tranches, assigning losses to the lowest tranches first, and to the highest tranches last. So if you have 1000 mortgages, and you slice it into 10 tranches of 100 each, and 250 mortgages go bad, then the lowest two tranches lose 100%, the next tranche loses 50%, and the top 7 tranches lose 0%. What the ratings agencies were doing by assigning AAA grades to the top tranches was estimating the likelihood that EVERYTHING would go bad was very low. And what I think a lot of people miss about the financial crisis is that this was not wrong. Not only was it correct in principle, but actual losses on AAA rated securities was extremely low because even among subprime a lot kept on being serviced. So the ratings agencies said "hell, we could have a massive crisis and these top tranches will still mostly pay out", and then we did have a massive crisis, and those top tranches still mostly paid out. There were a lot of issues and problems and corners cut and bad paperwork and robosigning and a hundred and one other scandals, some quite significant. However when you say: > They had assumed that "AAA" would remain relatively safe. It's worth remembering that this assumption was shown to be correct! From the financial crisis inquiry report: "Overall, for 2005 to 2007 vintage tranches of mortgage-backed securities originally rated triple-A, despite the mass downgrades, only [...] 4% of subprime securities had [...] losses imminent or had already been suffered by the end of 2009." On the other hand, something like 95% of lower rated tranches ended up suffering losses. The tranches were a mechanism for concentrating credit risk in the lower tranches; the problem isn't that it didn't work, but that 1) it worked really well and 2) everyone was badly underestimating the total about of credit risk in the system. AAA was mostly fine; everything short of AAA was absolute toast. (Also, I think you're missing how huge the decline in home prices was, both as cause and vector of the crisis. A vast amount of paper wealth nominally owned by the middle class vanished in a puff of smoke; most of the crisis was the result of that. But the impacts of an asset price bubble should properly be attributed to its inflation, not it's popping.)
- fweespeech 11y ago
  > "Overall, for 2005 to 2007 vintage tranches of mortgage-backed securities originally rated triple-A, despite the mass downgrades, only [...] 4% of subprime securities had [...] losses imminent or had already been suffered by the end of 2009." > (Also, I think you're missing how huge the decline in home prices was, both as cause and vector of the crisis. A vast amount of paper wealth nominally owned by the middle class vanished in a puff of smoke; most of the crisis was the result of that. But the impacts of an asset price bubble should properly be attributed to its inflation, not it's popping.) Its inflation exists because of how corroded the mortgage ratings were. None of them were correct except relative to each other within the mortgage bond market. You don't rate things AAA when they are really BBB. I understand you might feel that is correct but I sure as hell do not. https://www.moodys.com/sites/products/DefaultResearch/2006600000426807.pdf https://www.moodys.com/sites/products/DefaultResearch/200660... > Aaa 0.00% 0.00% 0.00% 0.00% 0.10% 0.07% That is the expected cumulative default rate for a AAA corporate bond. The mean is .10% with standard deviations of .07%. So when you say "4%" that is absurdly high in comparison yet they were marketed and sold as if they were equivalent risks. https://www.imf.org/external/pubs/ft/fandd/2008/06/pdf/dodd.pdf https://www.imf.org/external/pubs/ft/fandd/2008/06/pdf/dodd.... > The extent and speed of rating downgrades of asset-backed securities. Investors have learned to their cost that the credit ratings of structured credit securities are more likely to suffer rapid and severe downgrades than are corporate bonds (see chart). Not only have downgrades occurred more frequently to subprime securities, they have often been reduced several notches at once because of the sensitivity of such securities’ ratings to increases in assumed credit losses. As a result, investors’ faith in rating agency opinions has been shaken— credit spreads on AAA-rated U.S. residential MBSs have been priced at about the same level as BBB-rated corporate bonds since August 2007. The real value of the AAA-rated residential MBSs were the equivalent of BBB for other securities and had been for years preceding the event. The majority of the market was blinded by the assurances of the credit bureaus which were valuing BBB assets as AAA assets. A credit bureau that doesn't consistently and accurately estimate risk across securities is in many ways worse than useless because it gives a false sense of security where none exists. Similarly, captured referees / regulators / credit bureaus cannot be trusted if you are not the sole organization in control. However, I can see how this is likely more in the realm of opinion so I'll just leave it here but I think the comparison to corporate bonds is relevant.

Lazare 11y ago

Parts of that is right, but I think you mis-state a lot of the ratings stuff. The fundamental idea behind the ratings is (simplifying a lot) that you could take a lot of crap mortgages and then slice them into tranches, assigning losses to the lowest tranches first, and to the highest tranches last. So if you have 1000 mortgages, and you slice it into 10 tranches of 100 each, and 250 mortgages go bad, then the lowest two tranches lose 100%, the next tranche loses 50%, and the top 7 tranches lose 0%. What the ratings agencies were doing by assigning AAA grades to the top tranches was estimating the likelihood that EVERYTHING would go bad was very low. And what I think a lot of people miss about the financial crisis is that this was not wrong. Not only was it correct in principle, but actual losses on AAA rated securities was extremely low because even among subprime a lot kept on being serviced. So the ratings agencies said "hell, we could have a massive crisis and these top tranches will still mostly pay out", and then we did have a massive crisis, and those top tranches still mostly paid out. There were a lot of issues and problems and corners cut and bad paperwork and robosigning and a hundred and one other scandals, some quite significant. However when you say: > They had assumed that "AAA" would remain relatively safe. It's worth remembering that this assumption was shown to be correct! From the financial crisis inquiry report: "Overall, for 2005 to 2007 vintage tranches of mortgage-backed securities originally rated triple-A, despite the mass downgrades, only [...] 4% of subprime securities had [...] losses imminent or had already been suffered by the end of 2009." On the other hand, something like 95% of lower rated tranches ended up suffering losses. The tranches were a mechanism for concentrating credit risk in the lower tranches; the problem isn't that it didn't work, but that 1) it worked really well and 2) everyone was badly underestimating the total about of credit risk in the system. AAA was mostly fine; everything short of AAA was absolute toast. (Also, I think you're missing how huge the decline in home prices was, both as cause and vector of the crisis. A vast amount of paper wealth nominally owned by the middle class vanished in a puff of smoke; most of the crisis was the result of that. But the impacts of an asset price bubble should properly be attributed to its inflation, not it's popping.)

fweespeech 11y ago
> "Overall, for 2005 to 2007 vintage tranches of mortgage-backed securities originally rated triple-A, despite the mass downgrades, only [...] 4% of subprime securities had [...] losses imminent or had already been suffered by the end of 2009." > (Also, I think you're missing how huge the decline in home prices was, both as cause and vector of the crisis. A vast amount of paper wealth nominally owned by the middle class vanished in a puff of smoke; most of the crisis was the result of that. But the impacts of an asset price bubble should properly be attributed to its inflation, not it's popping.) Its inflation exists because of how corroded the mortgage ratings were. None of them were correct except relative to each other within the mortgage bond market. You don't rate things AAA when they are really BBB. I understand you might feel that is correct but I sure as hell do not. https://www.moodys.com/sites/products/DefaultResearch/2006600000426807.pdf https://www.moodys.com/sites/products/DefaultResearch/200660... > Aaa 0.00% 0.00% 0.00% 0.00% 0.10% 0.07% That is the expected cumulative default rate for a AAA corporate bond. The mean is .10% with standard deviations of .07%. So when you say "4%" that is absurdly high in comparison yet they were marketed and sold as if they were equivalent risks. https://www.imf.org/external/pubs/ft/fandd/2008/06/pdf/dodd.pdf https://www.imf.org/external/pubs/ft/fandd/2008/06/pdf/dodd.... > The extent and speed of rating downgrades of asset-backed securities. Investors have learned to their cost that the credit ratings of structured credit securities are more likely to suffer rapid and severe downgrades than are corporate bonds (see chart). Not only have downgrades occurred more frequently to subprime securities, they have often been reduced several notches at once because of the sensitivity of such securities’ ratings to increases in assumed credit losses. As a result, investors’ faith in rating agency opinions has been shaken— credit spreads on AAA-rated U.S. residential MBSs have been priced at about the same level as BBB-rated corporate bonds since August 2007. The real value of the AAA-rated residential MBSs were the equivalent of BBB for other securities and had been for years preceding the event. The majority of the market was blinded by the assurances of the credit bureaus which were valuing BBB assets as AAA assets. A credit bureau that doesn't consistently and accurately estimate risk across securities is in many ways worse than useless because it gives a false sense of security where none exists. Similarly, captured referees / regulators / credit bureaus cannot be trusted if you are not the sole organization in control. However, I can see how this is likely more in the realm of opinion so I'll just leave it here but I think the comparison to corporate bonds is relevant.