The problem with your theory is that many banks kept the riskiest tranches of loans for themselves while selling the safer tranches to others. They would only h

The problem with your theory is that many banks kept the riskiest tranches of loans for themselves while selling the safer tranches to others. They would only have done this if they believed the underlying mortgages were still good. Actually, that doesn't necessarily create any problems for Phil's point of view. That tranche of highly risky loans had to be kept by the banks - it was because this high risk stuff had been taken out of the pool that the rest of the pool looked so appealing to investors. However, the calculations to determine what percentage of loans needs to be in the high-risk tranche was very difficult to evaluate, especially if you were the investor seeking to buy the "safe" tranches, and not the bank that had originally sold the loan.