Comments on: Politics of subprime datapoint of the day A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: Danny_Black Tue, 22 Jun 2010 11:31:15 +0000 Pretty sure “80% of repackaged subprime debt” wasn’t rated triple A. Don’t think a single person argued there was zero correlation between the mortgages and in boom times the correlation is no more likely to be zero than in a crash – both times the correlation is likely to be high and you are confusing mezzanine with equity tranches.

The demand was from investors who wanted the ***appearance*** of low risk with a higher yield. Anyone who ACTUALLY thought they were taking on no risk should have “I am a moron” tattooed on their forehead and be forever banned from every having an asset except cash.

By: chartguy Mon, 21 Jun 2010 22:41:16 +0000 I love the chart, but I come to a very different conclusion.

There was very little deregulation of the mortgage industry. This spending was to encourage Congress to continue to encourage Fannie Mae and Freddie Mac to make dangerous loans.

The problems developed because the investment bankers fast-talked the ratings agencies into believing that 80% of repackaged/tranched sub-prime debt should be rated Aaa. They argued that mortgage defaults were independent events (ridiculous in any but boom times), and that because the worst tranche (mezzanine) would take the first 20% of mortgage defaults, the rest would get paid. The ratings agencies bought that argument and the Fed and regulators signed off on it.

Converting sub-prime debt to Aaa debt was like spinning gold from straw for the investment bankers. Their demand was limitless, once the ratings agencies signed on.