[VeilEm]

> that they knew weren't priced correctly

Things are priced at what they will sell for. It's more that they were hiding information about the risk (which of course would have drastically lowered the value and the price people would be willing to pay). I think the difference is significant, however.

[jynnantonnyx]

I have a box for sale labeled AAA. Price $5. Guaranteed to contain $6. Email me for details.

[jevgeni]

So, did anybody e-mail you?

[deciplex]

Can you expand on the significance of this difference? I guess you're asserting that the "correct price" is the one that someone will pay for it, and that something is only "incorrectly priced" if no one will buy it. But the point is precisely that no one would have bought these goods for the indicated price had GS not obfuscated what they were selling in the first place. It seems to me that you're really splitting hairs.

[BurningFrog]

I think VeilEm is saying it was a bait-and-switch, or maybe false marketing.

If you pay me $50k for a BMW, and I deliver a Honda, the problem isn't that $50k is the wrong price for a BMW.

[shrewduser]

there's no difference.

they weren't priced correctly is a perfectly reasonable thing to say, and synonymous with they lied about their level of risk.

[jevgeni]

CDO's are huge and complicated deals. All the little details are documented in the prospectus. Granted it's 700 pages long on average, but maybe people shouldn't be buying 2-3 billion USD securities if they don't have the capacity to understand and model them properly.

[shrewduser]

there aren't many humans who can grok that kind of info and truly understand it, that's why they were supposed to be rated accurately by ratings agencies.

[nl]

They were hiding the risk, both from the purchases and the ratings agencies.

BUT - and this is pretty important - the ratings agencies were negligent in their rating methodology. Intelligent buyers could see the problems.

The book The Big Short covers this in some detail.

[manuelflara]

A really good movie based on the book, with the same name, just came out. Watched it yesterday and I recommend it a lot. http://www.rottentomatoes.com/m/the_big_short/

[forgetsusername]

>They were hiding the risk

Please explain how they were "hiding" the risk.

Risk is unknown ex ante. Nobody knows the value of it. It is the responsibility of those buying the risk to have an estimate and price the security accordingly, ahead of time.

[nl]

Please explain how they were "hiding" the risk.

They mixed mortgages which were extremely unlikely to be repaid into packages with enough AAA rated mortgages so that they would meet the credit-rating agencies policy of rating mixed packages as AAA if a certain proportion were AAA.

However, these bonds would be valueless if any of the securities that made them up defaulted.

They sold the packaged bonds a AAA-rated securities without disclosing the likelihood that they would default.

Yes, this was stupid of the ratings agencies

Yes, the buyers should not have bought things they didn't completely understand.

But GS deliberately obfuscated the nature of what they were selling.

Risk is unknown ex ante.

That isn't entirely true. On this example specifically, it's pretty easy to see that if a household can just afford mortgage payments at a discounted rate it is pretty likely they won't be able to afford it when the discounted rate expires.

[yummyfajitas]

They mixed mortgages which were extremely unlikely to be repaid into packages with enough AAA rated mortgages so that they would meet the credit-rating agencies policy of rating mixed packages as AAA if a certain proportion were AAA.

There is no such thing as a AAA mortgage. AAA is a rating for bonds and other fixed income securities.

However, these bonds would be valueless if any of the securities that made them up defaulted.

This is not how a CDO works.

They sold the packaged bonds a AAA-rated securities without disclosing the likelihood that they would default.

Why don't you show us the CDO prospectus you allege doesn't do this? Once you produce it, I'll show you the exact (mandatory) table where it's done.

https://en.wikipedia.org/wiki/Collateralized_debt_obligation

Your comment is the financial equivalent of "The NSA is hacking my pixels in order to break the rot13 encryption." The words kind of suggest computing/finance, but anyone who knows what the words mean recognizes that the content is nonsense.

[nl]

See footnote 5 and 6 in https://scholar.google.com.au/scholar?client=tablet-android-... and the diagram on pg 196 in https://books.google.com.au/books?id=jD-LAgAAQBAJ&pg=PA196&l...

[forgetsusername]

>They mixed mortgages which were extremely unlikely to be repaid

This is an easy claim to make after the fact.

>However, these bonds would be valueless if any of the securities that made them up defaulted.

Not true at all. The bonds didn't become valueless. In fact, many of these bonds were purchased by the Fed, who made money off them. The issue was CDS' being triggered on defaulting mortgage bonds.

>They sold the packaged bonds a AAA-rated securities without disclosing the likelihood that they would default.

Did they not? Have you read the prospectus'?

Look, I'm sure there were many criminal actions here. But the uninformed, populist overreaction to the financial crisis by people who are unwilling to take personal responsibility is sad.