You are confusing subprime (mandated by fed CRA) and liar loans (illegal). Subprime mortgages are properly marked and the investor is aware of it when they buy MBS. What was hidden was within the good mortgages were hidden liar loans.
Rating agencies are paid by the banks to rate the MBS. As time goes on you will learn that rating agency analysts were never given access to the data on the individual loans. They would have detected the liar loans and rated the MBS low. When the analysts pressed for the data, the bank complained to the rating agency that as their customer they were being mistreated by the agency analysts. The rating agency management fearing loss of future business from the bankers basically told their analysts to find a way to satisfy the customer or ELSE (be fired)! Many analysts were forced to comply and reluctantly rated these MBS AAA. The rest is history.
When banks hide liar loans (illegal), rating agencies are forced to rate MBS AAA (riddled with liar loans), FMFM is stupid to buy or back everyone of them without reviewing them, and investors are buying them for pension funds, hedge funds, etc, etc, etc. You have the recipe for a major financial meltdown.
I would recommend you youtube William Black. He was the federal regulator during the S&L crisis. Many of the criminal activity of the S&L bankers are being repeated today in our current banking crisis. The gov can close a financial firm down from an audit that shows massive errors. Right now Fitch, Moody and several major rating agencies on Wall Street can be closed by the state and federal regulators for rating MBS AAA without using common industrial practices in analyzing the data of each loan in the bundle.
The loan applicant can be hauled in for an interview on why the loan application data does not match the loan applicants financial information and the bank can be hauled in to explain why loan information were not verified. If too many applications contain errors, regulators can close down the mortgage department of the bank and make a criminal referral to federal or state prosecutors.
Why isn’t all this being done? US Treasury fear that it would demoralize the banking industry at a time when they are needed to help the gov stabilize and untangle the mess. In the meantime the taxpayer is forced to bailout the situation and the criminal bankers are enjoying the fruits of their past fraud. Worst the public knows something is wrong but cannot fathom it because many of them are financial illiterates and even worst some believe the crisis is entirely the gov fault and the bankers were innocent victims.
Any “criminal activity” during the S and L problems, did not CAUSE the melt down at that time, and the same is true of our current mess.
Failure causes AUDITS which expose illegal activity.
It does not follow that the failure was CAUSED but said activity.