They Were Just, Y’Know, Kidding.

July 8th, 2013 by Rick Drain

While some people are calling it the Housing Crisis or the Sub-Prime Mortgage Crisis, if it had been either of those things it would not have grown to the world-shaking scale it did.

It was more accurately a Garbage Debt Derivative Crisis. Lots of really bad loans were bundled together, and then sliced into various debt bond-like derivatives. Some were designated to take the hit first if there were losses– those were considered riskiest, and had junk bond ratings. Other slices took the next risk, then the next, until one reached the top slice that would only lose money if all the others had already been wiped out.

If you were dealing with normal mortgages or company IOUs or bundles of credit card debt, and all other aspects were equal,  it would seem far-fetched that that top slice could have a loss. It seems safe. It seems like it should get a very good credit rating.

Wall Street firms  employ a lot of math whizzes who can expand the previous two paragraphs into pages of stochastic calculus equations, modern finance jargon, and unintended consequences. The regulatory highest rung of these firms are the Ratings Agencies, which are supposed to look at the debt, the models, and the assumptions, then grant an appropriate credit rating.

All other things were not equal, the debts were casually obviously garbage, and still the Ratings Agencies gave some of the slices high ratings.

Matt Taibbi of Rolling Stone tells the story with a lot more astonishing details:

The Last Mystery of the Financial Crisis

P.S. Although as Matt describes the US DOJ is suing the Agencies for $5Billion, I don’t think I need to tell you that none of the Wall Street workers or executives have been indicted, despite the ample evidence that they knew they were committing fraud. Sheesh.