The destroyer was allowing THOSE tranches to be further divided into a new set of tranches -- the ratings agencies did the rest by marking the higher levels of those tranches higher than they deserved to be...
Not quite. All deals, prime and sub-prime, are tranched. Prime and sub-prime denote the kinds of borrowers, not the tranche itself.
Sub-prime mortgages were packaged into deals completely separate from prime and Alt-A deals. These deals were credit-tranched so that, say the lowest rated "equity tranche" agreed to take the first, say, 5% of defaults, the BB tranche agreed to take the next 2% of defaults. The BBB would take the next 2%, on up to AAA. No one on Wall Street thought the AAA tranches would ever lose from defaults. They were wrong.