We totally knew. We actively gamed the ratings models.

What is befuddling now is that people actually /believed us/.

http://www.beyondthemargin.net/2009/03/p rivate-capital.html

“This picture shows how it is possible for sellers to originate securities that they know to be under-collateralized, up to two or three years before the evidence of fraud becomes clear. They are able to exploit the chasm in analytics and financial knowledge through plausible deniability. “How could we know?! Everything seemed fine.”

And:

“In fraudulently structured transactions – those in which the collateral is known to be worse than stated – the senior securities with high ratings ultimately turn out to be under-collateralized (illustrated in the ranges moving down and to the left on Figures 1-2) while the subordinated tranches, which typically bear low investment grade ratings, will be virtually wiped out with the passage of time. Most likely, they were not structured for immediate sale but rather held in portfolio by the arranging banks for repackaging in future CDOs (collateralized debt obligations), ABCP (asset-backed commercial paper) or SIVs (structured investment vehicles), where the inflated rating could be re-used to prop up the nominal value of the collateral.

An overhang of this low-value debt had existed on the books of the banks for several years when, in August of 2007, the most conservative segment of the U.S. capital markets suddenly awakened to the presence of subprime mortgages in ABCP collateral. Banks arranging RMBS transactions on behalf of themselves and their clients had believed they could hide behind the illusion of solvency for many years to come by selling the illusion of safety and soundness to a naïve and complacent public, a strategy that has become much more familiar after the Madoff revelations.”

I couldn’t agree more. Thanks for the reference.