My take on the mortgage backed concept is that it was a demand driven product. By that I mean that firms bought and sold them because they were profitable (no mention of their danger).
I think investment banks are better run as partnerships, because the partners take the time to determine how their capital is being risked. As a partner, I would have wanted to understand every detail of mortgage backed securities before I put my wealth at risk.
When investment bankers capital is not at risk (or an investment bank gets its equity elsewhere), the bar is lowered significantly.
Furthermore, the manner of compensation contributed to the problem. If you as a partner pay me as a junior investment banker on annual performance, I can collect a massive bonus and don't really worry about next year and the year thereafter. Solution, partners either must more carefully analyze products and/or compensation must not be so immediate.
The problems of matching risk and reward were fundamental to the collapse of Wall St. This stuff is way over the heads of managers whose capital is not at risk. A man or woman whose entire family wealth is at risk in said investment bank is going to be much more careful about making sure the products sold are solid investments for their customers...and, in the long run, for themselves.
You bet. Their leverage got to be ridiculous. They still didn't cause the crisis. Glass-Steagall still wouldn't have stopped bad mortgages.