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The bonds would typically be a composite of loans from all over the US. So the argument was made that even if (say) California's housing bubble crashed then onl

by andrew1 16y ago

The bonds would typically be a composite of loans from all over the US. So the argument was made that even if (say) California's housing bubble crashed then only a small fraction of your bond would suffer losses as the loans made in other states would be ok. Thus the banks claimed that these were uncorrelated safe investments and the rating agencies agreed to rate them highly. There is some argument to be made that an awful lot of sophisticated investors didn't recognise before the crash that there was such a high level of correlation, so to some extent we're talking with the benefit of hindsight at this point. With hindsight it seems obvious that these bonds were doomed, but without the benefit of what we now know, how much should the ratings agencies be blamed for not recognising the risks?

arethuza 16y ago
I wonder if anyone from these rating companies ever bothered to talk to the people actually buying these mortgages - i.e. the people the whole crumbly edifice was based upon. Or indeed how they were being sold. I would have expected someone to do some due diligence and find out what all of this business was actually based on. Some guys from Lehman Brothers did some actual research (i.e. they went and talked to the sales guys selling these mortgages) and concluded that it was all going to end in tears. At according to: http://www.amazon.com/Colossal-Failure-Common-Sense-Collapse/dp/0307588335/ref=sr_1_2?ie=UTF8&s=books&qid=1272456402&sr=1-2 http://www.amazon.com/Colossal-Failure-Common-Sense-Collapse...
- andrew1 16y ago
  Akadien has recommended "The Big Short" already, and I'd second that. It goes into a lot of detail about this situation. The problem with trying to price these CDOs was that an individual CDO might be made up of 100 pieces of other CDOs which each might be made up of parts of another 100 CDOs, which each might be made up of parts of a bond containing thousands of individual loans. So you could go and look at the individual loans but the effort to try and price the whole thing accurately would have been phenomenal. The most honest thing the agencies could have done was refuse to rate them. But that probably wouldn't have gone down very well with their clients.

by andrew1 16y ago

arethuza 16y ago

I wonder if anyone from these rating companies ever bothered to talk to the people actually buying these mortgages - i.e. the people the whole crumbly edifice was based upon. Or indeed how they were being sold. I would have expected someone to do some due diligence and find out what all of this business was actually based on. Some guys from Lehman Brothers did some actual research (i.e. they went and talked to the sales guys selling these mortgages) and concluded that it was all going to end in tears. At according to: http://www.amazon.com/Colossal-Failure-Common-Sense-Collapse/dp/0307588335/ref=sr_1_2?ie=UTF8&s=books&qid=1272456402&sr=1-2 http://www.amazon.com/Colossal-Failure-Common-Sense-Collapse...

andrew1 16y ago
Akadien has recommended "The Big Short" already, and I'd second that. It goes into a lot of detail about this situation. The problem with trying to price these CDOs was that an individual CDO might be made up of 100 pieces of other CDOs which each might be made up of parts of another 100 CDOs, which each might be made up of parts of a bond containing thousands of individual loans. So you could go and look at the individual loans but the effort to try and price the whole thing accurately would have been phenomenal. The most honest thing the agencies could have done was refuse to rate them. But that probably wouldn't have gone down very well with their clients.