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Rating a CDO AAA is beneficial for regulatory purposes - it allows banks to use a senior tranche as a capital reserve. This does not change the fact that every

• Retric 11y ago
  Sure, AAA really was more about the label than actual benefit. Still, I think it's important to understand most of these people where not idiots. There incentives just got wacky. I spoke with a few Mortgage issuers in this time period they could generally resell the whole mortgage fairly easily so throughput quickly became more important than quality because they where just selling them to someone else. And often wondering who the bleep would buy this crap. The buyers where often working with other peoples money, sure it might tank in a few years but they had little exposure to the downside. Making a few years of slightly above average returns worth it. Finally, I am not sure US regulators dropped to ball on this one as much as you might think. A huge chunk of these security's where sold outside of the US, so over a 20 year period this extracted a lot of foreign money 'for free'. As in we sold paper and got paid for it.
  • crdoconnor 11y ago
    >Sure, AAA really was more about the label than actual benefit. AAA is not just a label. It's about being allowed to sell to unsophisticated buyers who can't tell that you're taking them for a ride. It's also about being able to use the asset to count towards your capital reserves, so you can take more risk (as a bank) and get higher profits.