Here we go again. If the bankers did not load up mortgage backed securities with liar loans and rated them AAA paper when they were actually junk we could have survived the subprime meltdown. The first 18 months most of the failure in mortgage notes involved subprime mortgages. Mathematically the US financial system can survive the hit because subprime mortgages are clearly flagged before the investor buys them. The concept of subprime is economically stupid and time proved it because more then 1/3 defaulted and the taxpayer was on the hook for the losses. The coup de grace was the liar loans collapsed after the subprime. Here the losses were much larger because the investors paid higher prices for them because he thought they were AAA investments. Even worst the buyers used leveraged money to buy them. Derivatives were based on AAA odds of failure not junk odds. That makes a major difference in price and the cost of failure. We took a serious hit with subprime but we took a more severe hit from the liar loans. The gov CRA policy encouraged subprime, but never liar loans. That was invented by greedy bankers when they discovered that Freddie Mac and Fannie Mae were not reviewing the mortgage notes they were buying from the bankers and mortgage companies.
It happened because of government financed Freddie Mac and Fannie Mae. It’s that simple. Government needs to get out of the private economy, it doesn’t know anything about common sense or logic.
Actually, the first party to bundle sub-prime and liar loans and issue so-called mortgage-backed securities was Fannie Mae and Freddie Mac.
It's how they got additional funds to buy even more sub-prime and liar loans.
The AAA rating traced to the fact that Fannie Mae and Freddie Mac were "instrumentalities of the United States government" -- inferring a high degree of security.
The banks bought these...then began trading them.
No matter what direction you approach the problem from, you keep ending up back at Fannie Mae and Freddie Mac...and the federal government. All the rest of the exploitation and fraud was second order -- accessories after the fact.