Even this doesn't capture all of the problem. As I understand it[1], there were people that made their living by taking the BBB tranches based on sick cows and

Even this doesn't capture all of the problem. As I understand it[1], there were people that made their living by taking the BBB tranches based on sick cows and re-securitizing them (dividing them into yet more tranches, some of which would be upgraded again). The more you did this, the closer you could get to having all of the original subprime loans be AAA rated. For an example, say you had 100 subprime loans. You divide them up into tranches, and the top 86 become AAA, and the other 14 become something else. Then you combine this left-over 14 with the left-overs from other funds, and end up with, say, 100 of these lower rated securities. You then divide this set of 100 up into yet more tranches, 86 of which become AAA and the remaining 14 become something lower. Combine this 14 with left-overs from yet other funds, repeat many times, and eventually you can get nearly everything to be highly rated. There are claims that some groups of sick cows had dozens of levels of securities built up upon them, allowing ridiculously unsafe stuff to eventually become AAA. [1] Described here: http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom#page6 http://www.portfolio.com/news-markets/national-news/portfoli...